[MACRO Trends] An in-depth analysis of the US February CPI report - the complex game between inflation, tariffs and interest rates

 

The U.S. Bureau of Labor Statistics will release the February Consumer Price Index (CPI) report at 20:30 on Wednesday, March 12. Inflation was widely expected to ease during the month, but price pressures remained above what Fed officials had hoped for. After months of stagnant inflation progress, the impact of new Trump administration policies, such as tariffs and immigration restrictions, has renewed concerns about the prospects for improving inflation.

Analysts believe the initial impact of the tariffs will be seen in the report. Against this backdrop, price pressures are likely to remain elevated in the short term, with the Fed keeping interest rates on hold until data show more improvement. According to FactSet's consensus forecast, economists expect consumer prices to rise 0.3% in February from the previous quarter, lowering the annual inflation rate to 2.9% from 3.0% in January; core inflation, which excludes the more volatile food and energy prices, is expected to rise 0.3% quarter-on-quarter and 3.2% year-on-year.

 

If these forecasts are accurate, the annual rate of overall CPI inflation will fall below the psychologically important 3% mark for the first time since early 2023. While the exact details of the new tariffs have yet to be finalized, analysts said pressure from the tariffs discussed by the Trump administration has begun to weigh on the outlook as businesses start to bring forward inventory purchases and consumer sentiment sours. Jose Torres, senior economist at Interactive Brokers, said the pace of decline in commodity prices, which had previously put downward pressure on inflation, was starting to slow. “

“Commodities have been a reliable, consistent force in the pullback in inflation… but now, with the uncertainty around tariffs, we’re seeing that reversal,” he said, as businesses raise prices or buy inventory ahead of new tariffs. Torres expects prices of new and used cars, as well as food and clothing, to rise in February. Goldman Sachs economists also expect higher prices for airfare and communications, including the internet and used cars.

 

Although President Trump’s new tariffs were in their early stages last month and the outlook for future tariffs changes frequently, analysts said their impact may already be showing up in the CPI data. The 25% tariff on imports from Canada and Mexico, as well as additional duties on Chinese goods, could have a significant impact on consumer prices in the United States. These trade measures could force businesses to pass on increased costs to consumers, creating new inflationary pressures just when the economy appears to be moving toward price stability.

Torres said some businesses, such as car dealers, were already preemptively responding to tariffs by raising prices. As U.S. trade policy becomes clearer, the impact on inflation is likely to become more pronounced in the coming months. Industries with large import volumes, such as consumer electronics, auto parts and household goods, are likely to feel the most direct price impact. Industry analysts say the tariffs could start showing up more clearly in inflation data as early as April or May, depending on existing inventory levels and companies’ ability to absorb the costs.

 

"The February CPI report will likely show some initial impact from tariffs, but this is just the beginning," Wells Fargo economists wrote in a note to clients last week. "These trade frictions, combined with existing supply chain complexities, could, if prolonged, create price pressures that could undermine the Fed's confidence in the downward trend in inflation and potentially delay the pace of rate cuts that many market participants have been expecting." With inflation likely to remain elevated, analysts expect Fed officials to keep interest rates unchanged when they meet later this month.

The bond futures market is pricing in a 98% chance that the Fed will keep interest rates unchanged, according to the CME FedWatch Tool. In a speech last Friday, Federal Reserve Chairman Jerome Powell said the Trump administration is making policy adjustments in a number of areas, including trade, taxation, government spending, immigration and regulation, adding that the "net effect" of these changes will have important implications for the economy and the Fed's interest rate policy. As a result, he said the Fed is likely to keep its benchmark interest rate unchanged for the next few months as it waits for the widespread "uncertainty" caused by Trump's policies to settle.

 

But as the economic outlook darkens, market expectations for a rate cut this year have been brought forward. Bond futures traders now see about a 55% chance of a quarter-point rate cut at the June meeting, up from 43% a month ago. Even if inflation remains elevated, the health of the labor market is likely to be a key factor in central bank decisions. While February’s jobs report showed strong growth, analysts said headwinds were growing due to uncertainty over tariffs, ongoing federal layoffs and the threat of a broader economic slowdown and the impact of tighter immigration restrictions.

Financial markets have become more sensitive to inflation data, and each release can trigger significant volatility. Higher-than-expected inflation data could trigger a sharp sell-off in stock and bond markets as investors recalibrate their interest rate expectations. Currently, the U.S. stock market is facing a crisis. Trump's tariffs have panicked investors, and concerns about an economic downturn have triggered a stock market sell-off, causing the S&P 500 to evaporate $4 trillion from its high last month. Clearly US economic news is increasingly disappointing relative to baseline forecasts, which could increase the risk of surprises. This is unlikely to be good news for a market plagued by recession fears, with analysts believing that higher-than-expected data will exacerbate concerns about economic stagflation, further hitting stock market performance.