Fin-X Rapid Response 13th March 2025
- Brett Careedy
- Mar 13
- 4 min read
US CPI inflation eased by more than anticipated in February but remains above the Fed's 2% target. The FOMC is unlikely to cut the Fed Funds rate next week and the reaction function will likely be raised at the post-FOMC press conference next week.
US CPI increased +0.2% on a seasonally adjusted basis in February, after rising +0.5% in January, the U.S. Bureau of Labor Statistics reported last night. This was below the consensus estimate of +0.3%.
Over the last 12 months, the headline index increased +2.8%, also below the +2.9% estimate and down from +3.0% in January.
Core CPI ex-food & energy also eased by more than expected from +0.4% last month to +0.2%. The annual increase fell from +3.3% to +3.1%.
The index for shelter rose +0.3% in February, accounting for nearly half of the monthly headline increase.
The shelter increase was partially offset by a -4.0% decrease in the index for airline fares and a -1.0% decline in the index for gasoline. New vehicle prices also fell -0.1%.
Despite the decrease in the gasoline index, the energy index rose +0.2% over the month as the indexes for electricity (+1.0%) and natural gas (+2.5%) increased. Electricity and gas prices have risen by +2.5% and +6.0% over the last year, respectively.
The index for food also increased in February, rising +0.2%.
The "supercore" measure of core inflation ex-shelter rose by +0.2% in February and is up +3.8% over the last year, down from +4.0% yoy last month.
Yesterday, the US 25% tariffs on steel and aluminium imports came into effect. Both Canada and the EU announced retaliatory tariffs on similar values of imports, while Australia and the UK have declined to retaliate. The UK is currently negotiating a broader trade agreement with the US.
S&P500 5,599 +0.4%, Nasdaq Comp. 17,648 +1.2%, S&P/ASX200 future 7,799 +0.2%,
US 2yr 3.99% +4bps, US 10yr 4.31% +3bps
US dollar (DXY) index 103.6 +0.2%, AUDUSD 0.6321 +0.4%, Gold US$/oz 2,935 +0.7%
The Fin-X View
Last night's CPI data is the last data set before the imposition of tariffs and, somewhat worryingly, shows signs of flattening above the Fed's 2% target even before the tariffs arrive.
The shelter component is taking a longer time than usual to follow house prices and rents lower. Using more timely measures of shelter prices suggests the CPI should already be below target. If these were properly reflected, the Fed would likely continue easing.
However, the Fed is constrained by the prospect of higher inflation expectations becoming entrenched. Stickier shelter and other services measures in the "supercore" index, as well as the prospect of more tariffs, are already contributing to rising inflation expectations. On Monday, the NY Fed's inflation expectation index was the latest measure to increase from 3.0% to 3.1%, some way above the 2% target. 5yr breakeven inflation is also trading at 2.6%, up from 2.3% immediately before the election and 2.1% at the end of September last year.
So far, Jerome Powell has said that the Fed can afford to be patient as underlying growth remains reasonably strong. But confidence is fading, and cyclical activity is slowing in surveys. Stock market moves tend to lead CEO behaviour and substantial declines usually lead to layoffs.
The FOMC is unlikely to move next week and the market is not pricing an above-even probability of another cut until June. Four -0.25% cuts in total are priced in before the end of 2026.
Faced with the prospect of higher inflation and higher unemployment, journalists are likely to test the Fed's reaction function at the press conference. The current assumption is that the Fed will choose to support jobs. However, the Fed received feedback from workers after the pandemic that layoffs affect a few and are easier to cope with, while inflation wipes out purchasing power for an entire cohort of lower- and middle-income households.
We expect the Fed to remain as hawkish as they can until unemployment rises enough to push down inflation expectations. But once cuts start, they could easily accelerate beyond current pricing.
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