Downward surprises in both month-over-month and year-over-year Headline and Core CPI measures in February offer some relief following a spike in inflation at the beginning of the year. Yet, these data do not capture the full brunt of the rapidly escalating tariff environment. While 10% tariffs on Chinese imports were in place over much of February, these tariffs were recently increased to 20% and additional levies on Canada (25%) and Mexico (25%) loom. We expect trade policy to drive inflation higher over the coming months.

Trusted Insights for What’s Ahead^®®

• Cooler-than-expected February CPI data ensure that the door remains open for Fed rate cuts.
• While the prices of certain food items such as eggs rose sharply (10.4%) in February, prices for rental car and airfare moderated, consistent with the loss of momentum in consumer discretionary spending seen in other data. We expect cooler consumer spending to persist.
• While these data do capture some tariffs (the initial 10% tariff on China was implemented in early February) this story will become more apparent in the inflation data over the coming months as levies rise and expand to other countries.
• We project Core PCE inflation to levitate to 2.7% in Q2 2025 and then to very gradually converge toward the Fed’s 2% target in 2026.

Figure 1. Year-on-Year CPI Inflation

Report Highlights

Moderation in Headline Inflation

Total CPI rose by 0.2% m/m (month-over-month) in February (vs. 0.5% in January) expanding at the slowest rate since October 2024. Driving the increase were shelter prices (representing nearly half of the monthly all items increase) and energy services (including electricity). Core CPI inflation, or total prices less food and energy, decelerated to 0.2% from 0.4% in the prior month.

On a year-over-year basis, CPI inflation rose 2.8% compared to 3.0% in January and core CPI rose 3.1% compared to 3.3% in the previous month.

Figure 2. Month-on-Month CPI Inflation

Core goods prices rose 0.2% for the month, vs. 0.3% the month prior. Used car prices rose 0.9% while new car prices fell 0.1% from the month prior. On a year-over-year basis, core goods posted a minor decline (-0.1%) following a series of negative readings over more than a year. While core goods are no longer a source of deflation, core services inflation needs to subside to a larger extent for more substantial progress in overall inflation.

Core services rose 0.3% month-over-month (vs. up 0.5% the month prior) as price increases for rental cars and airfares moderated. Notably both rent of primary residence (RPR) and owners’ equivalent rent (OER) posted steady increases (0.3% month-over-month) consistent with the recent trends. On a year-over-year basis core services continued to subside (4.1% versus 4.3% prior), but only slowly and remain significantly above pre-Covid norms.