U.S. February CPI briefly calms the market; next week's Federal Reserve decision may become a new variable

Although the latest U.S. CPI data shows that inflation slowed in February, providing the market with a moment of relief. But this report only reflects the “past” economic picture; the real test for the Federal Reserve is the more complex macro environment we face today.
The economic chain reaction triggered by February CPI data and the Fed’s dilemma
At first glance, February’s CPI data indeed gives a sense of reassurance. The month-over-month CPI rose by 0.3%, and year-over-year by 2.4%; core CPI increased by 0.2% month-over-month and 2.5% year-over-year. From these figures, overall inflation pressure seems manageable, with a clear sign being the continued cooling of housing costs.

Based on this data, the market’s initial reaction was that the report did not reignite inflation fears and even maintained expectations for rate cuts. After all, moderate inflation data often strengthen market expectations for easing monetary policy.
However, after the report was released on March 11, the labor market remained weak, last year’s non-farm employment data was revised downward, and the Iran conflict pushed oil prices to historic highs.
This series of market behaviors also led the Federal Reserve, at its March 17-18 meeting, to face a complex situation where moderate inflation data coexisted with worsening economic growth and energy market pressures.
The labor market has long shattered the narrative expectation of a “soft landing”
Specifically, the February employment report showed that after adding 126k jobs in January, non-farm employment actually decreased by 92k in February, and the unemployment rate rose from 4.3% to 4.4%.

The moderate CPI combined with direct employment losses makes the inflation story more complicated because this is not the “de-inflation” the market prefers, but demand is cooling in an uncomfortable way.
More critically, the benchmark data was revised; the U.S. Bureau of Labor Statistics (BLS) confirmed that the non-farm employment figure for March 2025 was overestimated by 862k jobs, and the total change in non-farm employment for the year was sharply revised downward from 584k to 181k.

This means that the labor market in 2025 is actually much weaker than previously suggested by the media. The core issue the Fed faces now is not a trade-off between “soft CPI and strong employment,” but a scenario where both inflation data and the labor market are weakening.
Iran conflict makes CPI data “outdated upon release”
In the current complex economic situation, the Middle East conflict is undoubtedly a key driver turning the economic conditions into policy risks. As the fighting intensifies, oil prices soar, triggering sell-offs in Wall Street stocks, rising bond yields, and investors having to bear greater supply shock risks.
Meanwhile, despite weak labor data, the escalation of the Middle East conflict has increased inflation risks, leading Goldman Sachs to delay its first rate cut expectation from June to September.

Moderate CPI data confirmed that inflation in February did not accelerate, but whether this marks the beginning of a sustained decline or is just the last calm before oil shocks and labor deterioration become evident remains a core challenge for the Fed.
Even the Fed-preferred PCE index failed to provide a clear answer: January’s PCE rose by 0.4% month-over-month, core PCE increased by 0.4%, and year-over-year by 3.1%, indicating that underlying inflation pressures remain stubborn before the oil price shocks become apparent.
Conclusion:
Overall, while the February CPI somewhat eased market sentiment, it did not provide clear guidance for the Fed. The report appears calm because it only captures February; but the Fed must make decisions based on the economic situation in March, where weak employment and Middle Eastern oil shocks are reshaping the overall economic landscape.
This mismatch between “lagging” data and “immediate” risks can easily create a false sense of security. It’s like a false veil, leading people to believe the economy remains stable. But beneath this veil lie the true hidden risks of the current economic situation.
#通胀数据 #Federal Reserve