Inflation Cools More Than Expected In February, Strengthens The Case For Fed Rate Cuts

Inflation eased in February, coming in lower than expected and reinforcing the Federal Reserve's path toward interest rate cuts.

The headline Consumer Price Index fell from 3.0% year-over-year in January to 2.8% in February, according to a Bureau of Labor Statistics report released Wednesday. The reading was below economist expectations of 2.9%, as tracked by TradingEconomics, and marked the first decline after four straight months of rising price pressures.

On a monthly basis, CPI increased 0.2% in February, sharply moderating from 0.5% in January and below forecasts of 0.3%.

Core inflation, which excludes food and energy prices, slowed to 3.1% year-over-year, down from 3.3% in January and below forecasts of 3.2%. The monthly increase in core CPI was 0.2%, a cooldown from January's 0.4% pace and below estimates of 0.3%.

The shelter index climbed 0.3% in February, contributing nearly half of the overall monthly CPI increase. This rise was partially counterbalanced by a 4.0% drop in airline fares and a 1.0% decline in gasoline prices.

Other categories that saw price increases included medical care, used cars and trucks, household furnishings and operations, recreation, apparel, and personal care. Among the few major indexes that declined in February were airline fares and new vehicles.

Fed's Outlook: A Step Closer To Rate Cuts

The softer-than-expected inflation data strengthens the argument for Federal Reserve rate cuts in 2025, as policymakers seek to balance economic risks.

U.S. economic growth is projected to slow sharply in the first quarter, with several investment banks revising GDP forecasts downward. The Atlanta Fed's GDPNow model estimates a potential 2.4% contraction, raising concerns about economic weakness.

With inflation easing and growth concerns mounting, the Fed may find more room to cut rates to support the economy.

Prior to the report, money markets tracking Fed futures had priced in three to four rate cuts by year-end, according to the CME FedWatch Tool. The latest inflation data could further solidify that outlook.

Market Reactions

• U.S. dollar: The dollar softened following the inflation report, with the U.S. dollar index, tracked by the Invesco DB USD Index Bullish Fund ETF UUP, slipping 0.1% as traders priced in a higher likelihood of rate cuts.
• Treasury yields: The 10-year U.S. Treasury yield edged lower by 2 basis points to 4.26%.
• Stock market: U.S. equity futures turned higher, with S&P 500 futures up 1.4% in premarket trading at 8:35 a.m. ET. On Tuesday, the SPDR S&P 500 ETF Trust SPY closed at $555.92, its lowest level in seven months and 3% below its 200-day moving average. Contracts on the tech-heavy Nasdaq 100 were 1.6% higher.

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