Five-year low! U.S. February CPI meets expectations, but the Federal Reserve's rate cut window has been pushed back again.

As the effects of oil prices, tariffs, and other factors on prices become more apparent, the Federal Reserve’s first rate cut of the year may be further delayed until September.

Hidden Risks in PCE

On Wednesday (the 11th), the U.S. Bureau of Labor Statistics reported that February’s CPI increased by 0.3% month-over-month, up from 0.2% in January. Year-over-year, the CPI rose 2.4%, matching expectations and January, reflecting the fading high-base effect from the same period last year. Energy prices increased by 0.6% month-over-month and 0.5% year-over-year. Food prices rose 0.4% month-over-month and 3.1% year-over-year. Egg prices fell 3.8% month-over-month and dropped 42.1% year-over-year.

Core CPI, excluding food and energy, increased by 0.2% in February, down from 0.3% in January; it rose 2.5% year-over-year, in line with expectations and January. As the largest component of CPI, housing prices increased by 0.2% month-over-month and 3% year-over-year. Rents rose only 0.1% month-over-month, the smallest monthly increase since January 2021. Clothing prices, sensitive to tariff pressures, increased by 1.3% month-over-month. New car prices remained stable, with a 0.5% increase year-over-year.

Although companies have absorbed most import tariffs, Wall Street analysts believe that, given ongoing high input costs indicated by the ISM survey, companies are unlikely to continue bearing all costs. In response to the Supreme Court ruling, President Trump announced a 10% global tariff, with plans to raise it to 15%.

Stephen Stanley, Chief U.S. Economist at Santander US Capital Markets, said: “The issue is that, although tariff levels have stabilized, there is evidence that input costs are still rising. The cost transmission effects could persist for some time.”

This Friday, the U.S. will release the delayed January PCE Price Index data, which is the Fed’s most closely watched inflation indicator. It’s important to note that while February core CPI data was moderate, it may not necessarily mean that core PCE inflation will also rise gently, due to different weights and the January Producer Price Index (PPI) report showing unexpectedly strong service sector prices.

Ludovic Klandal, Chief Economist at Litzen ICAP, said: “Differences in weights and the unexpectedly strong service sector PPI could lead to a significant rise in broader consumer price indices. Similar effects might cause the February core PCE Price Index, released on April 9, to trend upward.”

Policy Outlook

Following the release of the latest inflation data, expectations for a Fed rate cut have cooled. According to the CME FedWatch Tool, before the data was released, the market priced in a 99% chance that the Fed would hold rates steady at the March meeting next week. The probability of a rate cut at the April meeting is only 11%, down from 21% a month ago. Traders now expect the next rate cut to occur in September, with about a 43% chance of a second cut before the end of the year.

Most analysts believe that this data release predates the recent surge in oil prices caused by the Iran conflict, suggesting that the impact of rising energy costs may become more evident over the coming months.

Carson Group Chief Macro Strategist Sonu Vaghis said: “February CPI inflation was in line with expectations, but this is just calm before the storm. Rising gasoline prices in March will bring new inflation pressures. Even without energy shocks, this report shows the Fed still faces inflation issues: tariffs are still impacting core goods inflation, and inflation in services outside housing remains high.”

According to AAA, since the U.S.-Iran conflict escalated at the end of February, gasoline prices at stations have surged over 18%, reaching $3.54 per gallon. Oil prices briefly surpassed $100 per barrel. While CPI increased, the broad impact of tariffs previously implemented by Trump is still gradually passing through prices; these tariffs were enacted under a law applicable during a national emergency, which the Supreme Court has now invalidated.

In the coming months, high oil prices could complicate inflation prospects, as increases in gasoline and other energy products tend to ripple through transportation, shipping, and various consumer goods. Even if core prices remain stable, sustained crude oil price increases will quickly reflect in overall inflation data. How much these factors influence Fed rate decisions will become clearer after next week’s policy meeting.

André Schneider, Senior US Economist at BNP Paribas Securities, said: “Just the recent rise in oil prices could push overall inflation up by 0.15 to 0.30 percentage points, depending on how the conflict evolves.” While food prices are expected to remain moderate, Schneider added: “If oil prices stay high, they will push up fertilizer and transportation costs, potentially further increasing food inflation later this year.”

Morgan Stanley suggests the Fed may resume rate cuts as early as June, but the oil price shock from the Iran conflict could delay their actions. Despite rising energy prices potentially fueling inflation, the bank’s economists maintain their forecast of two rate cuts this year, in June and September, each by 25 basis points. However, they also see a possibility that the first cut could be delayed until September or even December, which would push the next rate cut into 2027.