CPI posts a soft month in February.We won't know for some time tariff effects on inflation.

We won't know for some time the tariff effects on inflation.

The consumer price index rose a modest 0.2% in February, a sharp step down from January's 0.5% rise. On a year-over-year basis, consumer prices are up 2.8%. Core inflation, which excludes volatile food and energy prices, is running at a 3.1% pace.

February's softening came from slower price growth across a fairly wide range of goods and services. Likely transitory factors include a 1% drop in gasoline prices, after spikes in December and January, and a retreat of food inflation to just 0.2% on the month. But other categories also saw marked slowing, including autos and motor vehicle insurance. Medical care services accelerated to a 0.3% monthly increase. 

Shelter inflation, which has been the most persistent component of consumer prices, rose 0.3%, or 3.7% on an annualized basis. That roughly equals the average rate over the past six months. 

I have emphasized in the past that these data are very "noisy", that is, they are volatile from month to month. So we don't want to put too much emphasis on the February softening. 

And of course we have new tariffs in place or coming. Today, the Trump Administration imposed 25% tariffs on imports of aluminum and steel. While these were welcomed by US metals producers, they will boost costs substantially for the much larger set o f US companies that uses these metals as inputs to production. And of course the Administration has imposed tariffs on Chinese, Canadian, and Mexican goods, with threats of broader and larger import levies. 

The impact of tariffs on consumer prices will take time to filter through, and the final effects are impossible to judge given the on-again, off-again nature of the tariff impositions. It may be several months before we begin to see substantial inflationary effects, although we may well see some impact as early as this month.

Today's relatively benign inflation report will have no effect on Federal Reserve interest rate policy. When the Fed meets next week, it will hold the line on interest rates, and I think that will continue to be the case for at least the first half of this year, barring a sharp downward slide in US economic activity and rise in the unemployment rate. That can no longer be ruled out, given the likely adverse impacts on spending of stock market losses, uncertainty, federal layoffs, and retaliatory foreign tariffs. 

Buckle up.