Inflation Cools, Primarily Due to Lower Airfares
February’s US consumer price inflation showed a surprising cooling trend with both headline and core inflation registering at 0.2% month-on-month, contrary to the anticipated 0.3%. This change brought the annual rate of headline inflation down to 2.8% from 3%, and core inflation dipped to 3.1% from 3.3%. Although the month-on-month change in core inflation was 0.227%, which is still above the 0.17% trend needed to achieve the Federal Reserve’s 2% year-on-year target, it remains a positive development for the Federal Reserve.
However, this optimistic view is somewhat tempered by a notable 4% month-on-month decrease in airfares, a key driver of the lower inflation readings. While new car prices fell by 0.1% and gasoline prices decreased by 1%, other areas appear to be maintaining a neutral to rising trend. Services excluding energy continue to rise at 0.3%, along with a 0.6% increase in apparel and a 0.9% rise in used vehicles.
Tariff Threat Could Reinvigorate the Inflation Threat
There is a concern about anecdotal evidence indicating firms are preemptively raising prices in anticipation of potential tariffs. Contracts that extend over a longer term need to consider possible future input cost increases. Recent reports highlight an increase in the proportion of companies raising prices, pointing to a risk that core inflation may start to increase again in the coming months.
The uncertainty surrounding tariffs and the related price raises could impact consumer spending power, potentially leading to a decline in consumer sentiment and expenditure. Additionally, the ambiguity in the trade environment and the threat of reciprocal tariffs might negatively affect corporate sentiment, with companies possibly hesitating on investments and hiring until more clarity is achieved. This uncertainty is feeding into discussions about a potential recession. Nonetheless, the current economic indicators show growth and job additions, leading us to believe that the Federal Reserve is unlikely to cut rates again before September.
Housing Costs Could Slow Dramatically Later in the Year
A particular area of interest is the trend in new tenant rents, with reports suggesting a significant decrease. If this trend continues, it might result in cooler Consumer Price Index (CPI) housing measures later in the year. This would mitigate inflation fears related to tariffs since housing constitutes over 40% of the core inflation basket. If we begin to see signs of economic weakening, this could skew risks towards the possibility of more rapid Fed rate cuts towards the end of the year and into early 2026.
