Consumer Price Index (CPI) inflation moderated in February, following an elevated rate in January. Headline CPI inflation in February increased at an annualized rate of 2.6%, down from a 5.7% annualized growth rate a month earlier, arriving at a 2.8% rate for the last 12 months. The more closely watched core CPI (excluding food and energy) rose at a 2.8% annualized rate in February, down from 5.5% in January, with its 12-month rate at 3.1%. Given vagaries in reported shelter costs, we have been tracking a core inflation measure that also excludes shelter. That measure showed an annualized growth rate of 2.2% in February, down from 6.1% in January, with its 12-month rate also at 2.2%.
As remarked in previous posts, the questionably high readings for shelter costs occurred prior to last summer. In more recent months, shelter costs have been reported as rising in the 3%-4% range, and that continued in February.
Throughout most of the last two years, goods prices were flat or falling, and services prices kept overall inflation above the Federal Reserve’s (Fed) 2% target. That script flipped in February and had mostly flipped in January. Core goods prices rose at a 2.7% rate in February and at a 3.5% rate in January, up, again, from generally zero change over most of 2023 and 2024.
In contrast, the CPI for services excluding energy and shelter rose at only a 2.6% annualized rate in February, and the corresponding measure for the Personal Consumption Expenditures (PCE) price index rose at that same pace in January. Such a service price inflation rate would be consistent with the Fed’s 2% target for overall core inflation given, again, that goods prices ''typically'' run at a much cooler pace—but not recently.
Are the recently elevated goods price increases an indication of retailers anticipating the Trump tariffs? The data are mixed on this question. In many goods sectors, prices continued to fall or be flat in February. However, there were noticeable increases in the prices of used cars, appliances, apparel, personal care products (toothpaste, etc.) and alcoholic beverages.
Used car prices are volatile month to month, and it is worth noting that new car prices declined slightly. Similarly, prices for apparel and appliances declined in January before bouncing in February. So, again, it is not clear that the February goods price increases are a result of looming trade wars.
Still, it is disquieting that goods prices on average have bounced a bit lately, just when services prices look to be behaving themselves. The February CPI report indeed retraced the January spike, as we were expecting, and that is encouraging. However, there are still issues in the report that require further scrutiny.