Inflation in the U.S. may have seen a slight easing last month, but economists warn it could be a temporary relief. Market observers anticipate that tariffs implemented by President Donald Trump will likely sustain elevated prices in the forthcoming months.
According to projections, the Labor Department is expected to reveal on Wednesday that February’s consumer price index increased by 2.9% compared to the previous year. This indicates a slight decrease from January’s 3% and marks the first decline in five months. Notably, last fall saw inflation ease to a three-and-a-half-year low of 2.4% in September.
Core prices, which exclude food and energy due to their volatility, are also predicted to dip slightly, settling at 3.2%, down from January’s 3.3%. These core prices are crucial for economists as they can offer a more accurate forecast of future inflation trends.
Despite possible reductions, both figures have generally remained at similar levels since last summer, when inflationary improvements plateaued following a steep fall from 2022’s peak of 9.1% in June. Prolonged high increases in prices could lead to political challenges for Trump, who, during his campaign, vowed to significantly reduce inflation.
With the President having imposed or considering imposing tariffs on imports from various countries, including Canada, Mexico, China, Europe, and India, economists widely anticipate that price growth will likely remain elevated throughout the year.
Dan North, a senior economist at Allianz Trade Americas, expressed skepticism about reaching a 2% inflation target. He suggested that inflation numbers might start moving in the opposite direction due to these economic pressures.
Despite the potential declines indicated by Wednesday’s data, the Federal Reserve is unlikely to significantly alter its current stance on interest rates, which were cut thrice last year due to falling inflation signs. Fed Chair Jerome Powell confirmed in January that the rate cuts were on hold and emphasized that a rate cut in the upcoming Federal Reserve meeting is improbable.
Both headline and core prices are anticipated to show a modest monthly increase of 0.3% from the previous month in February, an improvement over January’s 0.5% spike. However, these growth rates remain too high to align annual inflation with the Fed’s 2% goal.
The tariffs, along with their potential expansion, stand as significant variables impacting the Federal Reserve and the U.S. economy. Since his inauguration, Trump has implemented 20% tariffs on all Chinese imports and has levied 25% duties on imports from Canada and Mexico, with many of these measures temporarily suspended.
This Wednesday, the administration plans to impose additional duties of 25% on steel and aluminum imports, which could potentially drive up prices for goods such as cars and electronics. Furthermore, Trump has announced reciprocal duties on countries imposing tariffs on U.S. exports starting April, affecting regions like Europe, India, and South Korea.
The introduction of these duties has unsettled financial markets and raised concerns of a potential recession. Analysts from the Yale Budget Lab estimate that these reciprocal tariffs could raise the average U.S. tariff rate to its highest level since 1937, possibly costing American households up to $3,400.
In addition to the tariffs, other factors like a surge in egg prices are expected to contribute to rising inflation. An avian flu outbreak has required the culling of over 160 million birds, including 30 million in January alone, resulting in a national average egg price of $4.95 per dozen in February—a historic high.
Further, economists will scrutinize prices in sectors like automotive, insurance, airline tickets, and rents to gauge the broader trajectory of inflation. Gas prices, however, are expected to show a decline.
In economic terms, textbooks view tariffs as typically engendering a singular rise in prices rather than ongoing inflation. Yet, Treasury Secretary Scott Bessent recently acknowledged, despite such expectations, prices might still rise.
Federal Reserve Chair Jerome Powell has observed that, in certain scenarios, tariffs could intensify inflation if implemented as a series of successive price hikes, potentially shaping consumer inflation expectations over the long term.
These expectations can significantly affect inflation if they alter behaviors among businesses and consumers anticipating higher costs in the future. Businesses might pre-emptively raise their prices if they foresee escalating operational expenses.
