February CPI: Disinflation loses traction as energy shock emerges

February's CPI report may already feel like old news with oil prices up roughly 25% since the end of last month. Yet the February data showed that the disinflationary momentum exhibited since last summer is proving hard to maintain. Headline inflation rose 0.3% in February, leaving the year-over-year rate at 2.4% but pushing the more recent three-month pace up to 3.0%.

Energy prices rose 0.6% in February, essentially in line with our forecast. Oil and gas prices were already rising in February in anticipation of a conflict in the Middle East, underpinning the solid 1.1% gain in energy goods during the month. Assuming the cost of regular gas averages $3.65 per gallon for the rest of this month, we estimate energy goods will rise a more jarring ~18% in March.

Food prices came in hotter than expected in February. Grocery store prices rose 0.4%, flattered by a robust gain in fruits and vegetables pricing. On a year-over-year basis, food at home strengthened to 2.4%, drifting further away from the trends in food-related commodity and producer price measures of foods that have been receding. While the shock to energy prices puts upward pressure on food prices, we still anticipate food inflation will ebb in the coming months.

The core CPI rose 0.22% in February, more or less in line with our projections for a 0.19% increase. Core goods came in slightly softer than we expected. This was largely a vehicles story, with used autos prices dropping 0.4% and new vehicle prices flat in the month. Core goods ex-autos, which probably better captures the pass-through to inflation from tariffs, rose 0.22%, a bit stronger than we were forecasting. Apparel prices jumped 1.3%, the highest reading since September 2018. The February data showed a similar month-on-month rise in tariff-related categories including recreation goods (+0.4%), motor vehicle parts & equipment (+0.4%) and household furnishings (+0.2%). The chart "Tariff Impact on Prices" below illustrates how these categories have seen a series of notably above-trend prints since Liberation Day in April 2025.

Core services advanced 0.3% in February, slightly stronger than anticipated. The beat stemmed from travel-related services, which rose 1% over the month and continued a three-month streak of solid gains, and a sizable gain in medical services (+0.6%). Elsewhere, primary shelter moderated a touch, as rental costs rose only 0.1% over the month, the lowest since 2021. Spot measures of rents have been soft for a while now and suggest the CPI's measure of shelter has a little more room to moderate this year.

The stubborn picture of overall inflation has been even more apparent when viewed through the lens of the PCE deflator. While more input details will be made available tomorrow with the February's PPI release, today's data point to another robust increase in PCE inflation. We currently estimate both headline and core PCE will rise a "low" 0.4% in February, with higher weightings in the PCE index for some goods components being a key source of the PCE's persistent strength of late.

For the FOMC, today's report is probably a little bit more dated than is typically the case for a CPI print, with policymakers' primary focus on the uncertain outlook for energy prices and the broader inflation outlook in light of the developing conflict with Iran. On balance, today's inflation data probably does little to sway the hawks, doves and undecideds one way or the other. We published an updated U.S. economic forecast and fed funds rate outlook in a separate report this morning. Our forecast remains for two 25 bps rate cuts from the FOMC at the June and September meetings, followed by an extended hold at 3.00%-3.25%.

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