Inflation Cooled to 2.8% in February, Lower Than Expected
Justin Lahart
5 min read
Inflation cooled last month, but the latest data may offer less comfort to U.S. businesses, consumers, and Federal Reserve policymakers than it otherwise would because tariffs are threatening to raise some prices in the months ahead.
Consumer prices were up 2.8% in February from a year earlier, the Labor Department reported Wednesday, versus a January gain of 3%. Economists polled by The Wall Street Journal had expected a 2.9% gain.
Prices excluding food and energy categories—the so-called core measure that economists watch in an effort to better capture inflation’s underlying trend—rose 3.1%. That was the lowest year-over-year reading since 2021.
That was also lower than the 3.2% expected by economists.
Stocks jumped at the opening bell, then gave up some of their gains. Analysts warned that an encouraging inflation print wasn’t enough to make up for the tariffs uncertainty. Moreover, details of the report suggested that Fed policymakers might not be as relieved by it as investors initially hoped.
The cooler-than-expected report was “not as encouraging as it looks,” said Capital Economics economist Thomas Ryan.
Wall Street is beginning to worry that the tariffs, in combination with actions by Elon Musk’s Department of Government Efficiency, could push the U.S. into a recession. Already, consumers are showing signs of anxiety. Consumer sentiment fell nearly 10% in the University of Michigan’s February survey. Consumer spending in January had its largest monthly drop in four years.
Airline fares dropped a seasonally adjusted 4% in the inflation report. Delta Air Lines on Monday said domestic demand had softened, with Chief Executive Ed Bastian saying on CNBC that in February “consumer spending started to stall.”
Economists are struggling to keep up with the recent tariff news, but are pushing up their inflation estimates nonetheless. Goldman Sachs economists last week raised their forecast for the Commerce Department’s core inflation gauge to 2.9% in the coming fourth quarter from a year earlier. That compared with a previous estimate of 2.4%.
But Wednesday’s report largely predates President Trump’s recent tariff actions, which means the full effect of the new tariffs will be captured only in future reports.
The report isn’t likely to change the Fed’s decision to hold interest rates steady when policymakers meet next week.
The Fed follows a separate price measure from the Commerce Department, and that one tends to run a bit cooler than the Labor Department’s. Even adjusting for that, however, Wednesday’s data suggests that inflation continues to run above the central bank’s 2% inflation target.
Grocers say eggs are one of the leading drivers of food inflation over the past few months. - Spencer Platt/Getty Images
Indeed, economists cautioned that the Labor Department’s cooler inflation reading might not carry over into the Commerce Department’s. That is because some of the data that the Commerce Department uses comes from separate sources. Notably, the airline-fare price figures it uses come from the Labor Department’s reading on wholesale prices, which is due out Thursday.
Interest-rate futures on Wednesday morning implied that the chances of the Fed resuming rate cuts by its June policy meeting were fractionally lower than before the inflation data came out.
If tariffs keep inflation elevated, they could limit the Fed’s ability to quickly lower rates on any signs of economic weakness since policymakers would worry that their attempts to forestall a potential downturn might instead add to upward pressure on inflation.
One reason for February’s cool reading was that shelter prices, which have been a significant source of inflationary pressure in recent years, continued to ease. They were up 4.2% from a year earlier—the smallest gain since December 2021.
The Labor Department’s measure of shelter costs lags behind price trends in newly signed leases. That means that a previous slowdown in rent inflation is only now starting to show up. But rents now are on a steady climb in parts of the U.S.
Tariffs aren’t the only inflation concern consumers have had lately. Food prices have risen, especially (but not only) for eggs, where shortages have arisen as a result of bird flu. Wednesday’s data showed that the price of a dozen grade-A large eggs averaged $5.90 last month, a record, compared with $3.00 a year earlier. Overall food prices were up 2.6% from a year earlier, continuing a recent firming trend.
Food prices, like gasoline prices, are highly volatile, which is why they are removed from core inflation measures. But they can also play an outsize role in people’s thinking about inflation, explains Carola Binder, a University of Texas at Austin economist and the author of “Shock Values: Prices and Inflation in American Democracy.”
“People know what price they’re used to paying, so the changes in price are pretty apparent,” she said.
That could create additional challenges for the Fed, especially in combination with all the tariff news.
When inflation started shooting higher in 2021 and 2022, measures of people’s inflation expectations didn’t move up all that much. That was good news for the Fed. When people and businesses expect more inflation, they can push for wage and price increases ahead of the fact, which can turn into a self-fulfilling prophecy.
In the earlier stages of that last bout of price increases, the Fed characterized the run-up in inflation as “transitory,” on the expectation that as Covid-era bottlenecks eased, things would cool off. But it took much longer than policymakers expected.
“Having just been through this big bout of inflation, consumers are going to be a lot more tuned in,” Binder said. “They’re going to be a lot less easy to convince that any price increases that policymakers say are transitory are really transitory.”
