TLDR
- February CPI rose 2.8% annually, below January’s 3% and analyst expectations of 2.9%
- Core inflation (excluding food and gas) increased 3.1% annually, the lowest since April 2021
- Shelter costs showed signs of easing, rising 4.2% annually – smallest increase since December 2021
- Energy index rose 0.2% monthly but declined 0.2% annually, with gas prices dropping 1%
- Markets responded positively, with major indexes opening higher after the report
Inflation pressures eased in February according to the latest Consumer Price Index (CPI) report, bringing relief to investors who had been concerned about the health of the U.S. economy. The data, released Wednesday by the Bureau of Labor Statistics, showed that inflation is continuing its gradual downward trend.
The CPI increased 2.8% over the prior year in February. This was lower than January’s 3% annual gain and beat economist expectations of a 2.9% annual increase. On a monthly basis, the index rose 0.2%, slower than January’s 0.5% increase.
Core inflation, which excludes volatile food and gas prices, climbed 3.1% over last year. This marked the lowest yearly increase in core CPI since April 2021 and a decrease from January’s 3.3%. The monthly core inflation rate was 0.2%, down from 0.4% in January.
February was the first time since July that both headline and core CPI showed slowing price growth. This cooling inflation provided some reassurance to markets that had experienced turbulence in recent weeks.
Much needed relief for equity markets
Seema Shah, chief global strategist at Principal Asset Management, called the report a “much needed relief for equity markets.” She noted it helps ease concerns about stagflation and gives the Federal Reserve room to cut interest rates in coming months if economic data continues to weaken.
Housing costs, which have been a stubborn component of inflation, showed further signs of moderation. The shelter index rose 4.2% annually, the smallest 12-month increase since December 2021. Monthly, shelter costs increased 0.3%, down from 0.4% in January.
Both rent and owners’ equivalent rent increased 0.3% over the prior month. Gargi Chaudhuri from BlackRock noted that housing inflation is typically “sticky,” making the recent trend in housing prices an encouraging sign for future inflation.
Energy costs presented a mixed picture in February. The energy index rose 0.2% month over month, much less than January’s 1.1% jump. On a yearly basis, energy prices actually declined 0.2%, helped by falling gas prices, which dropped 1% after rising nearly 2% the previous month.
Food prices showed signs of slowing
Food prices showed signs of slowing after several months of stubborn increases. They rose 0.2% in February, down from 0.5% in January. However, egg prices continued to surge, jumping another 10.4% after a 15.2% increase in January, largely due to bird flu affecting supply.
On an annual basis, egg prices have soared 58.8%. Jeffrey Roach, chief economist for LPL Financial, warned consumers to expect elevated egg prices in the near term, noting that during a 2015 bird flu outbreak, high egg prices persisted for several months.
Other categories that saw price increases in February included medical care, used cars and trucks, household furnishings, recreation, apparel, and personal care, according to the Bureau of Labor Statistics.
Financial markets responded positively to the inflation news. Following the report, the Dow Jones Industrial Average opened up 202 points, or 0.5%. The S&P 500 gained 1%, while the Nasdaq Composite rallied 1.7%.
Treasury markets had a more muted reaction. The yield on the 2-year Treasury note rose to 3.99%, while the 10-year yield increased to 4.32%. David Rosenberg of Rosenberg Research called the inflation report “a decent number” and expressed surprise that bond markets hadn’t responded more favorably.
Federal Reserve unlikely to cut rates immediately
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, cautioned that despite the positive inflation reading, the Federal Reserve is unlikely to cut rates immediately. “The Fed has adopted a wait-and-see posture, and given the uncertainty of how trade and immigration policy will impact the economy, they’re going to want to see more than one month of friendly inflation data,” she wrote.
Market analysts noted that the report provided some relief after weeks of market volatility. Paul Hickey, co-founder of Bespoke Investment Group, remarked that despite the S&P 500 finishing down 0.76% the previous day, “it almost seemed like a positive day in some ways. That’s how miserable the last three weeks have been for bulls!”
The impact of tariffs remains a key concern for markets. The S&P 500 had briefly been on track to close in correction territory on Tuesday before staging a partial recovery. Investors will continue watching for signs of how new tariffs might affect inflation and economic growth in coming months.
Looking ahead, Wall Street will receive additional economic data in the coming days, including an update on producer price inflation on Thursday and the University of Michigan’s latest consumer sentiment survey. These reports may provide further clarity on the economic outlook as markets navigate uncertainty from Washington, D.C.
The February CPI report represents the latest datapoint in the ongoing battle against inflation, which peaked at over 9% in June 2022. While inflation remains above the Federal Reserve’s 2% target, the downward trend provides hope that price pressures continue to ease.
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