At a Glance

  • Inflation rose less than expected in February, according to data released by the U.S. Bureau of Labor Statistics on Wednesday, but markets are concerned that the escalating trade war between the U.S., the European Union, and Canada will push up price pressures and weigh on economic growth.
  • After rising 0.4% month-over-month in January, the core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose 0.2% month-over-month in Februaryrose 0.2%, driven by a 0.3% increase in housing costs and a 0.9% rise in used cars and trucks prices. A 0.8% decline in transportation services prices, including airfares, helped pull the year-over-year core CPI increase down to 3.1%, the lowest level since 2021.
  • "This CPI report is encouraging, but it does not yet incorporate the impact of the new tariffs," Scott Helfstein, head of investment strategy at asset manager Global X, said in an email. "Tariff effects could begin to show up as early as next month, but the lag could also be longer."

In-Depth Analysis

Federal Reserve Chair Jerome Powell said last Friday that policymakers will not cut the benchmark interest rate further until inflation shows sustained signs of returning to the 2% target.

Between September and December of last year, the Fed cut the federal funds rate by a full percentage point in total. Powell suggested that at the March 18-19 meeting, policymakers are likely to hold the main interest rate steady in the current 4.25% to 4.5% range.

The CPI data came as the EU and Canada announced billions of dollars in retaliatory tariffs on U.S. goods in response to U.S. tariffs on steel and aluminum imports that took effect at midnight.

After news of the worsening trade war and its potential to fuel inflation, interest rate futures traders lowered their expectations that policymakers would cut rates by at least 25 basis points before June.

As of Wednesday, traders saw a 76% likelihood of a rate cut before June, down from 84% on Tuesday, according to data from theCME FedWatch tool。

"We still believe the Fed's next rate move will be a cut, but with tariff effects still uncertain, it's hard to have very high confidence," Helfstein said. "The key question is whether tariffs have a bigger impact on growth or on prices."

Trump administration officials acknowledge that tariffs will push up inflation, but unlike many private-sector economists, they insist that price pressures will be temporary.

Treasury Secretary Scott Bessent dismissed concerns on March 6 that the Trump administration's tariffs would fuel inflation.

"Overall, I'm not worried about inflation," he said, asserting that tariffs would bring a "one-time price adjustment" while removing barriers to U.S. exports, increasing federal revenue, and providing funding fortax cuts for "Main Street"。

Recent surveys show that concerns over the inflationary impact of tariffs have weakened business and consumer confidence, while prompting many economists to raise the likelihood of a recession.

In January,consumer spending fell 0.5%, well before President Trump announced sweeping tariffs on products from Canada, Mexico, China, the EU, and other trading partners. Consumers contribute nearly 70% of U.S. economic growth.

"The uncertainty from the White House's rapidly announced tariff measures could weigh on the economy," Ed Yardeni, president of Yardeni Research, said in a research note to clients.

"If uncertainty persists, consumers may cut spending, businesses may be reluctant to invest, and ultimately the job market could suffer," Yardeni said. On Wednesday, he raised his recession probability from 20% to 35%.