Inflation eases more than expected in February, but Trump tariffs loom

Inflation eased more than expected in February, but the reprieve probably will be short-lived, economists say, with President Donald Trump's barrage of import tariffs set to propel prices higher.

Used car prices rose while gasoline costs fell. Grocery prices were flat after a flurry of increases, and rent increases slowed to a new three-year low.

Some economists say the president’s import fees, especially on Chinese shipments, may already be reigniting inflation for products such as household furnishings, apparel and electronics.

In February, consumer prices climbed 2.8% from a year earlier, down from a 3% rise the previous month, according to the Labor Department’s consumer price index, a measure of average changes in goods and services costs. That breaks a string of four straight increases in the annual price measure but still leaves it well above the September low of 2.4% and the Federal Reserve’s 2% goal.

On a monthly basis, costs rose a modest 0.2%, well below January’s outsized 0.5% jump.  

What is core inflation?

Core inflation, which excludes volatile food and energy items and is watched closely by the Federal Reserve because it reflects more sustainable trends, also increased 0.2%, down from 0.4% a month earlier.

That nudged down the annual increase to 3.1% from 3.3% the month before.

"The softer-than-expected" inflation report "is encouraging news, though it doesn’t tell us much about where inflation is headed," Nationwide economist Oren Klachkin wrote in a note to clients. "With tariffs possibly set to push goods prices higher and services still exerting upward pressure on CPI, we see inflation risks as tilted to the upside."

Why are gas prices coming down right now?

Gas prices dipped 1% last month and have edged lower lately. Regular unleaded averaged $3.08 a gallon Tuesday, down from $3.14 a month ago and $3.39 a year ago, according to AAA.

Although tariffs on Canadian oil could push gas prices higher in some areas, concerns that the trade war will weaken the global economy are putting some downward pressure on crude and pump costs. Also, oil-producing nations such as Saudi Arabia and Russia are moving to increase production after having cut their output.

Will groceries be cheaper in 2025?

Though grocery price gains have slowed after a pandemic-related surge, they’ve accelerated recently, in part because of drought, hurricanes and a two-year bird flu outbreak that has caused egg prices to soar. Egg costs jumped another 10.4% last month after a 15.2% rise in January.

Other items also rose sharply, including cereal by 2.1%; bread by 0.4%; and uncooked ground beef by 2.7%.

But prices of some other staples rose modestly or declined. Bacon fell 2.3% and fresh fish and seafood edged up just 0.1%. Easing costs for those items was enough to leave grocery prices unchanged after a spate of substantial increases.

Restaurant bills, meanwhile, advanced 0.4% in a sign that a pandemic-related rise in wages is still making it expensive for Americans to dine out.

Will rent increases slow?

Perhaps the most encouraging news is that rent increased a relatively modest 0.3% for the third month, extending a a slowdown and nudging the annual increase from 4.2% to 4.1%, the smallest since January 2022. Lower rents for new leases are finally filtering into rates for existing tenants.

That’s significant because housing costs have served as the biggest driver of inflation, making up 35% of overall price increases in February.

The moderating cost of other services also brought consumers some relief. Airline fares tumbled 4%, reversing increases in the prior two months. Economist Samuel Tombs of Capital Economics said the drop was a big reason for February’s tame inflation reading. And hotel rates rose just 0.2%.

Other service prices increased more slowly, with auto insurance and car repairs rising 0.3% and hospital services up just 0.1%.

Some goods' prices rose more sharply as used cars leaped nearly 1% after a 2.2% gain in January. And apparel prices increased 0.6%. Furniture, though, dipped 0.1%.

Is inflation rising again?

After easing significantly last spring and summer following a pandemic-related spike, inflation began creeping up again in the second half of 2024 as the cost of services such as auto insurance, health care and dining out marched higher. Economists pointed to employee pay increases as well as vehicle shortages and price hikes, all of which were traced to the pandemic.

Meanwhile, goods such as used cars that were getting cheaper as COVID-19 supply chain snarls resolved are again rising in price now that those benefits have played out.

Despite the bumpy return to historically normal price increases, forecasters expected inflation to resume its descent the first half of this year as rent increases – the biggest inflation driver – continued to moderate. More favorable comparisons to lofty prices a year ago were also set to slow annual cost increases.

But Trump moved more swiftly than expected in socking some imports with tariffs, including a 25% levy on steel and aluminum; 20% on all shipments from China; and up to 25% on goods from Canada and Mexico that aren’t covered by a 2020 trade deal among the U.S. and those nations.

In a research note, Bank of America said the levies on Chinese products, which took effect in early February, already may be driving up prices for goods such as furniture, apparel and electronics. But economist Ryan Sweet of Oxford Economics said those fees "don't appear to have had a discernible impact" on last month's inflation numbers.

Barclays said it expects the tariffs to filter through to consumer prices starting this month.

Trump's sweeping tariffs on steel and aluminum imports took effect Wednesday.

Even though many import fees haven’t yet been imposed, Wells Fargo economist Sam Bullard said tariff concerns “are already affecting pricing decisions” as some firms charge more in anticipation of the higher costs.

The most far-reaching tariffs are poised to hit next month, including sweeping reciprocal levies that would match those other countries charge the U.S. while also accounting for other trade barriers, such as value added taxes and government subsidies.

Goldman Sachs expects the various fees largely to be passed to consumers and to increase inflation by nearly a percentage point by year’s end compared with a scenario in which no tariffs are imposed.

Barclays predicts inflation will be stuck at 3% the rest of this year while the core price measure hovers at about 3.3% through December.

How many interest rate cuts are expected in 2025?

With inflation still high and more tariffs expected, the favorable CPI report for February likely won’t be enough to persuade the Fed to lower interest rates again at a two-day meeting that concludes March 19. After reducing its key rate by a percentage point late last year, the Fed has held it steady as inflation accelerated in recent months.

"Inflation is still running too hot for the Fed to consider cutting interest rates," economist Thomas Ryan at Capital Economics wrote in a note to clients.

Fed officials are set to release new forecasts revealing how much they estimate they’ll trim the rate this year. In December, they pared their estimate to just two cuts in 2025, though futures markets now expect as many as three, with the first coming in June.

In a speech last week, Fed Chair Jerome Powell said officials were in no hurry to lower rates again and can afford to wait and see how Trump’s tariffs affect inflation.

But economists say the central bank will face a vexing dilemma if the duties both increase prices and weaken the economy or tip it into recession, as many forecasters predict. The Fed raises rates to fight inflation and lowers them to juice a soft economy.    

(This story was updated to add new information.)