Consumer Price Index February 2025

Disinflationary fundamentals ahead of tariff pressures 
 

• For the first time in five months, inflation moved lower in February. This confirms that despite the idiosyncratic price bumpiness, economic fundamentals were and remain disinflationary. Looking ahead, however, tariffs, confusion around trade policy and tighter immigration policy mean the risks to inflation are tilted to the upside.
  
  
• Headline Consumer Price Index (CPI) rose less than expected with a 0.2% month-over-month (m/m) increase in February following a 0.5% jump in January. Energy prices rose 0.2% as the decline in gasoline prices was offset by higher fuel oil and natural gas prices. Food prices rose by the least since August 2024, up 0.2%, despite residual egg price pressures (up 10%) stemming from the avian flu and consumer hoarding. 
  
  
• Core prices (excluding food and energy) rose a smaller-than-expected 0.2% m/m in February, half the January pace. Core goods prices increased 0.2%, while core services prices (excluding energy) gained a milder 0.3% driven lower by a moderation in shelter costs, easing auto insurance prices and plunging airfare.
  
  
• On an annual basis, headline CPI inflation fell 0.2 percentage point (ppt) to 2.8% year over year (y/y) — marking the first deceleration in five months — while core CPI inflation cooled 0.2ppt to 3.1% y/y – the slowest pace since April 2021. 
  
  
• Short-term inflation dynamics showed some modest improvement in February. Headline CPI inflation cooled 0.2ppt to 4.3% on a three-month annualized basis and remained steady at 3.6% on a six-month annualized basis. Core CPI inflation eased 0.2ppt to 3.6% on a three-month annualized basis and ticked 0.1ppt lower to 3.6% on a six-month annualized basis. 
  
  
• The Fed is currently on pause. With Fed officials needing to see “real progress” on inflation or a notable deterioration in labor market conditions to consider further easing policy, the combination of still-elevated inflation and resilient labor market conditions will keep the Fed on hold at the March 18–19 Federal Open Market Committee (FOMC) meeting. 
  
  
• We believe the Fed will maintain a wait-and-see approach over the coming months and expect only two Fed rate cuts in 2025, in June and December. If the prevailing policy uncertainty worsens and market volatility rises further, this could lead to a vicious feedback cycle onto the economy, prompting some policymakers to consider further easing monetary policy. However, we suspect many Fed officials will favor retaining a restrictive stance to prevent inflation reignition — especially if inflation expectations rise further.
   

Energy prices rose 0.2% last month as a 1.0% decline in the price of gasoline was more than offset by higher utility gas service (+2.5%), electricity (+1.0%) and fuel oil prices (+0.8%). 

Food prices posted their weakest gain since August 2024, up 0.2%, with grocery prices flat following a notable 0.8% jump in January. Egg prices were again a key contributor to higher food prices, but lower prices in other food categories, including dairy, fruits and vegetables, provided some offset. The ongoing avian flu outbreak led to another 10.5% m/m increase in the price of eggs, following a 15.2% surge in January. Overall, egg prices are up 59% from a year ago. Restaurant prices picked up by 0.4% over the month, the largest increase since January 2024. Overall, grocery price inflation remained steady at 1.9% y/y while restaurant price inflation ticked up to 3.7% after reaching its lowest level since July 2020.

Core goods prices rose 0.2% m/m in February, with used car prices up 0.9% following a 2.2% jump in prices. New car prices, meanwhile, fell slightly on the month while apparel prices rebounded 0.6% after seeing their strongest post-pandemic decline. Overall, core goods prices are still falling (as they have been for a year), but the deflation momentum has eased to -0.1% y/y in January and February. 
 

Core services prices rose at a more moderate 0.3% monthly pace in February, following a 0.5% bump at the start of the year. Both rent cost and owners’ equivalent rent rose 0.3%. As anticipated, the January surge in hotel prices wasn’t repeated as they only rose 0.2% last month. Overall, shelter cost inflation eased 0.1ppt to 4.3% y/y in February, its lowest since December 2021, with rent inflation trending lower to 4.1% y/y and owners’ equivalent rent inflation easing to 4.4% y/y.
 

Transportation services prices fell 0.8% driven lower by a 4% plunge in airfare prices and some moderation in auto insurance prices, which rose only 0.3% over the month. Meanwhile, medical care service prices rebounded 0.3% after a flat reading in the prior month. On an annual basis, medical care services inflation picked up 0.3ppt to 3% y/y while airfare inflation eased to -0.7% y/y and auto insurance cost inflation fell 0.7ppt to 11.1% y/y, down from a peak of 23% y/y in April 2024.