US CPI data meets expectations, February core CPI year-over-year falls to five-year low!

In February, U.S. inflation appears to be cooling steadily, but the transmission effects of tariffs are emerging, with sharp increases in appliance and clothing prices. Amid soaring crude oil prices triggered by Middle East conflicts, this “peaceful” data has been ignored, and next month’s inflation may face a major test.

According to the latest data, the U.S. Consumer Price Index (CPI) for February shows a stable cooling trend, with all core indicators precisely matching market expectations.

The U.S. Department of Labor reported on Wednesday that the Consumer Price Index rose 2.4% year-over-year in February. This figure is unchanged from January and in line with economists’ forecasts. Excluding volatile food and energy items, core prices increased 2.5% year-over-year, also meeting expectations.

After the data release, the dollar index briefly rose by more than ten points; the euro against the dollar dipped nearly 20 points; the pound against the dollar fell about 20 points.

A 2.5% core year-over-year inflation rate means that the U.S. is at its lowest inflation level since March 2021 (when the annualized rate was 1.6%). Since January this year, the slowdown in core inflation has been exactly what Federal Reserve policymakers have been hoping for.

Although the February inflation “report card” is not worrying, recent conflicts related to Iran have led markets to generally consider this data “historical.”

Bloomberg Intelligence’s Chief U.S. Interest Rate Strategist Ira Jersey pointed out: “Markets will skip directly over this expected CPI data and focus instead on the energy markets driven by Middle East tensions. The breakeven point for short-term TIPS (inflation-protected securities) will follow oil prices, while real yields will reflect the impact of energy prices on economic growth.”

Despite stable core data, the breakdown within the inflation basket shows complex and interesting structural differentiation:

The housing index rose 0.2% month-over-month, again becoming the largest single contributor to overall inflation. Additionally, energy prices increased 0.6% in February. Under the current geopolitical backdrop, next month’s energy inflation data will face significant scrutiny.

Worryingly, signs of cost pass-through from tariffs are emerging. Prices for household goods, including furniture and appliances, rose 3.9% year-over-year, the largest increase since May 2023. Appliance prices alone jumped 2.9% in one month, the biggest monthly increase since August 2022 (when inflation was extremely high).

Clothing prices increased 2.5% year-over-year, reaching the highest level since October 2023.

Audio-visual product prices surged 4.5% year-over-year, hitting a record high. Interestingly, this was not driven by TVs (which actually fell 4.1% year-over-year), but entirely by “auditory consumption”: audio equipment prices soared 13.5%, while music subscription services also hit a historic 9.1% increase.

Prices for used cars and auto insurance declined in February. Although prices for healthcare, airline travel, and education services rose, the increases were moderate and insufficient to reverse the overall downward trend in core inflation.

Since the Iran conflict erupted, U.S. benchmark crude oil futures have been highly volatile, with the average trading price this month around $82 per barrel, compared to an average of about $65 in February. Therefore, inflation data for March could be even more heated.

RSM Chief Economist Joseph Brusuelas estimates that, based on empirical rules, every $10 increase in oil prices per barrel raises the Labor Department’s inflation reading by about 0.2 percentage points. While estimates vary slightly among economists, most believe oil prices will push up March inflation.

Economists also believe that, due to last year’s government shutdown, the housing cost increase data for October is missing, artificially lowering the current year-over-year inflation figures. However, this downward bias is expected to disappear in the April inflation report, with the measured inflation rate rebounding accordingly.

Ongoing updates…