Inflation slows more than anticipated in February, but potential Trump tariffs pose a threat.

Inflation Cools More Than Expected in February, but Trump Tariffs May Drive Prices Higher

Inflation eased more than anticipated in February, but economists warn the relief may be short-lived as President Donald Trump’s import tariffs threaten to push prices back up.

Used car prices increased, while gasoline costs declined. Grocery prices remained steady after a series of hikes, and rent growth slowed to its lowest pace in three years.

Some economists suggest that tariffs—particularly on Chinese imports—are already fueling inflation in categories like household furnishings, apparel, and electronics.

Consumer prices rose 2.8% in February compared to a year earlier, down from January’s 3% increase, according to the Labor Department’s consumer price index. This marks the first decline in four months but remains above the September low of 2.4% and the Federal Reserve’s 2% target.

On a monthly basis, prices climbed just 0.2%, a significant slowdown from January’s 0.5% surge.

What Is Core Inflation?

Core inflation measures price changes while excluding volatile food and energy costs, making it a key indicator for the Federal Reserve as it reflects underlying economic trends.

In February, core inflation rose 0.2%, down from 0.4% in the previous month. This brought the annual increase down to 3.1% from January’s 3.3%.

Nationwide economist Oren Klachkin called the lower-than-expected inflation report “encouraging news” but cautioned that it offers little insight into future inflation trends. “With tariffs potentially driving up goods prices and services still putting upward pressure on CPI, we see inflation risks tilted to the upside,” he wrote in a note to clients.

Although tariffs on Canadian oil could drive up gas prices in certain regions, concerns that the trade war may weaken the global economy are helping to keep crude oil and pump prices in check. Additionally, major oil-producing nations like Saudi Arabia and Russia are ramping up production after previous output cuts.

Meanwhile, restaurant prices climbed 0.4%, reflecting the continued impact of higher wages in the service industry, making dining out more expensive for Americans.

Rent, a key driver of inflation, rose by a modest 0.3% for the third consecutive month, bringing the annual increase down to 4.1%—the lowest since January 2022. Lower rents on new leases are gradually influencing prices for existing tenants, a promising sign for overall inflation relief. Housing costs remain significant, accounting for 35% of February’s total price increases.

Goods that had been getting cheaper—like used cars, which benefited from supply chain improvements—are now seeing renewed price increases as those temporary effects fade.

Despite these fluctuations, economists expect inflation to continue its downward trend in early 2025, thanks to slowing rent increases and comparisons to last year’s elevated prices.

Trump acted more quickly than anticipated in imposing tariffs on various imports, including a 25% tax on steel and aluminum, a 20% levy on all goods from China, and up to 25% on items from Canada and Mexico that aren't covered by a 2020 trade deal with those countries.

In a research note, Bank of America suggested that the tariffs on Chinese imports, which took effect in early February, may already be pushing up prices for goods like furniture, apparel, and electronics. However, economist Ryan Sweet from Oxford Economics noted that these tariffs "don't appear to have had a noticeable impact" on last month's inflation data.

Barclays anticipates that these tariffs will begin affecting consumer prices starting this month.

Trump's broad tariffs on steel and aluminum imports went into effect on Wednesday.

Although many import fees have not yet been applied, Wells Fargo economist Sam Bullard pointed out that tariff concerns are already influencing pricing decisions, with some companies raising prices in anticipation of higher costs.

The most significant tariffs are set to take effect next month, including sweeping reciprocal levies that would match tariffs other countries impose on the U.S., while also factoring in trade barriers like value-added taxes and government subsidies.

Goldman Sachs forecasts that these tariffs will largely be passed on to consumers, potentially increasing inflation by nearly one percentage point by the end of the year compared to a scenario without tariffs.

Barclays predicts inflation will remain at 3% for the rest of the year, with the core price measure hovering around 3.3% through December.

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

Federal Reserve officials are expected to release new forecasts showing how much they plan to reduce rates this year. In December, they lowered their estimate to just two rate cuts in 2025, but futures markets now predict as many as three, with the first expected in June.

In a speech last week, Fed Chair Jerome Powell stated that officials are not in a rush to lower rates and can afford to wait and assess how Trump’s tariffs impact inflation.

However, economists warn that the central bank may face a tough decision if the tariffs push prices up while also weakening the economy or triggering a recession, as many predict. The Fed typically raises rates to combat inflation and lowers them to stimulate a struggling economy.