The headline consumer price index (CPI) rose 0.2% as expected in February. Inflation on a year-on-year basis moved up one tick to 2.2%.
After boosting headline inflation in January, energy prices took a breather, up only 0.1% on the month. Energy prices are up 7.7% versus a year ago, driven by double digit increases in the price of gasoline and fuel oil.
Core inflation was also up 0.2%, as expected, which left the year-on-year pace of core inflation unchanged at 1.8%. Shelter prices (0.2% m/m), apparel (+1.5%) and motor vehicle insurance (+1.7%) all contributed notably to the monthly increase in inflation. Prices for household furnishings and operations (+0.3%), education (+0.2%) and personal care also rose on the month. Declines for medical care (-0.1%), communication (-0.6%), new vehicles (-0.5%) leaned against the monthly gains.
Notably, core goods prices rose for the third consecutive month in February (0.1%). That hasn’t happened in three years. Core goods prices are still down 0.5% versus a year ago, but that degree of deflation compares to a 1% decline last fall. Core services inflation has remained fairly steady at 2.6% year-on-year, roughly where it has been for about seven months.
Key Implications
There were few surprises in February’s inflation report. Headline inflation rose modestly and core inflation remained steady, as it has for about the past five months. That is set to change in March. As the month-on-month decline in prices a year ago – driven in large part by new cell phone contracts that drove down communication prices – falls out of the data, even a modest increase in core prices in March will see year-on-year core inflation rise above 2%.
That does not include the inflationary impact of steel and aluminum tariffs that are set to come into force in the coming days. TD Economics estimates that these tariffs could lift CPI inflation by about 0.1 percentage point (see report). Beyond tariffs, the depreciation of the U.S. dollar also looks to be starting to show up in higher prices for core goods. This trend should also contribute to higher core inflation in the coming months, alongside increased government spending which is also expected to raise inflationary pressures.
The question for the FOMC is not if inflation is rising, but how much all of these forces – tax cuts, spending increases and now tariffs – will lift inflation, and how quickly the Fed should raise rates in response. For now, we are comfortable with our view for three hikes this year. But, there is certainly an upside risk to this view, with so many upward forces at play.
