The US Consumer Price Index (CPI) rose 0.2% in February, coming in slightly softer than expected, according to data released on Wednesday.
The moderation follows January’s unexpectedly strong reading and was driven by slower growth in food and energy costs, as well as an easing in core goods and services inflation.
“The outturn is a welcome development after January's unexpectedly strong print,” Wells Fargo economists said in a note. However, they cautioned that inflation has “essentially moved sideways since early 2024.”
Energy and food prices contributed to the decline in headline inflation. Overall energy prices rose 0.2% as a 1.4% increase in energy services was largely offset by a 1% drop in gasoline prices.
Grocery store prices remained flat despite a sharp 10.4% increase in egg prices, while prices for fruits, vegetables, dairy, and other food products fell. However, food away from home rose 0.4%.
Inflation still above pre-pandemic levels
Core inflation, which excludes food and energy, also moderated in February. The core CPI rose 0.2%, about half the pace of January’s 0.45% increase.
Despite the softer CPI reading, inflation remains elevated compared to pre-pandemic levels. The annual core CPI rate slowed to 3.1% in February, marking a three-and-a-half-year low, but Wells Fargo noted that higher tariffs on goods could put renewed upward pressure on inflation.
“With today's data in hand, we expect the core PCE deflator to increase around 0.35% in February, which would keep the Fed's preferred inflation measure running closer to 3% than its 2% goal,” Wells Fargo analysts said.
Complex challenges for Fed
In light of this, analysts are split on the potential impact on monetary policy.
Nikos Tzabouras, an analyst at Tradu, said the lower-than-expected inflation reading “can support a recovery in US equities, as it strengthens the case for the Federal Reserve to resume its rate-cutting cycle amid concerns over the economy and consumer spending.” However, Tzabouras cautioned that the central bank faces a complex challenge and is unlikely to move quickly from its current holding stance.
Echoing similar concerns, Bill Adams, Chief Economist for Comerica Bank, remarked that inflation resumed its moderating trend in February after an interruption at the turn of the year. He warned that “the dizzying back-and-forth over tariffs is a large and unpredictable upside risk to the inflation outlook.”
In contrast, Nigel Green of deVere Group emphasized a more urgent approach, stating that the Fed faces a difficult balancing act. “This dangerous mix—pockets of inflationary pressure alongside an economic slowdown—puts the Fed in a precarious position,” Green said. He called for swift action, adding, “Rate cuts must come sooner rather than later to prevent deeper damage.”