US CPI meets expectations in February

In contrast to recent developments in the Middle East, February’s US CPI report contained no major surprises.

Headline prices rose 0.3% last month, leaving annual inflation unchanged at 2.4%, as economists had expected. Similarly, core inflation printed at 0.2% MoM and 2.5% YoY, with the latter also matching both January’s figure and market consensus. With little new information to price in post-release, the dollar is, also usurpingly, little moved.

Admittedly, we did suspect ahead of time that traders might not pay this report the kind of attention that would ordinarily be expected. A sharp rise in energy costs since the end of February, stemming from disruption to oil and gas flows through the Straits of Hormuz, has prompted fears of a renewed inflation spike amongst traders. If true, that would limit the forward-looking implications of these latest inflation numbers. We, however, are sceptical on this point. The US labour market is much less tight than in 2022, limiting the extent to which an energy price shock can translate into an inflation jump.

Combine that with our base case expectation that any conflict will be short, and the oil price impact contained, then we think Fed officials should still be concerned primarily with the evolution of domestic inflation pressures.

Here, we see better news. Core goods inflation landed at just 0.08% MoM in February, up only fractionally from the month prior and still showing no meaningful impact of US tariff policy. Shelter inflation also came in little changed from January, up just 0.01pp to 0.23% MoM. Granted, apparel has risen sharply, up 1.28% in just one month. But used vehicle inflation slipped again with prices falling -0.38% in February after a -1.84% decrease in January.

We take some signal from this last category as a predictor for core goods prices looking ahead. If correct, that would point to further disinflation in the pipeline, with dovish implications for the Fed.

All told then, this leaves us somewhat off consensus when it comes to US rate expectations. As of writing, swaps price just 1.3 cuts in 2026 – we continue to look for three, starting in June. Today’s data keeps that call alive, assuming Middle East tensions fade in the coming weeks, with downside implications for the dollar provided the FOMC also meets our expectations.

Author:

Nick Rees, Head of Macro Research

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