US Feb core inflation data shows no signs of Trumpflation

·       In Feb, Trump imposed 10% tariffs on China, but its effect on imported inflation was not visible due to higher imports from China in advance.

·       Overall average run rate and any moderate impact of Trumpflation shows US core inflation may hit 2.0% Fed targets by mid-late 2026

·       The 3MRA of US core CPI was 3.2% in February’25 against the Fed’s actual target of 2.3%, which is equivalent to core PCE inflation of 1.5%

·       Fed may close the QT by June’25 and cut rates by 25 bps each in June and Dec’25, but one can’t rule out another rate cut in Sep’25 to fight Trumpcession narratives

The US and also global financial market are now almost fully controlled by Trump’s morning moods, whims & fancies, and Truths; not economic data and Fed comments. The market participants remain focused on escalating trade war tensions under President Trump and their potential impact on Wall Street and also Real Street. Wall Street crumbled Thursday on escalated Trump/US-EU trade war tensions and fading hopes of an imminent Ukraine war ceasefire. Also, a looming US shutdown drama was affecting risk trade and USD. But on early Friday, March 14, 2025, US stock futures rose. The risk trade Sentiment improved amid signs lawmakers in Washington will successfully avert a government shutdown. On Friday, Dax Future also recovered from earlier US-EU escalated trade war panic low on the progress of the German debt deal, which may be historic to fighting the Trump tantrum.

On Wednesday (12th March), some focus the focus of the market was also on U.S. inflation data for February’25 as it may influence the Fed's decision for any rate cut action in March. Also, the market was watching any effect of Trump’s draconian imposition of 10% additional tariffs on Chinese goods in early February in the headline inflation number. The US CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, such as food, transportation, and shelter. Core CPI excludes the volatile food and energy categories to provide a clearer view of underlying inflation trends.

 On Wednesday, the BLS data (NSA) showed the annual (y/y) US core CPI inflation edged down to 3.1% in February’25 against 3.3% sequentially and below the median market expectations of 3.2%. The 3MRA of US core CPI was 3.2% in February’25, against 3.1% sequentially and still substantially above December’19 pre-COVID 3MRA 2.3% and the Fed’s price stability targets for core CPI levels of 2.3%; i.e. Fed needs to bring down core CPI inflation to the least 2.3% on a sustainable basis from present average of 3.2% to achieve its price stability targets. But at 3.1%, the US core inflation in February’25 was the lowest since April ’21.

Overall, the average US core CPI was at 3.2% in 2025 (YTM), 3.4% in 2024 against 4.8% in 2023, 6.2% in 2022, and 2.0% in 2019. As per the current sequential run rate, the US core CPI inflation may come down to around 2.3% Fed targets by December’26. The US core CPI needs to go down ALMOST 100 bps from present levels for the Fed’s price stability target of core CPI inflation of around 2.3%, which is equivalent to core PCE inflation of around 1.5%. The Fed needs core CPI and core PCE inflation around 2.3% and 1.5% so that overall average core inflation remains around 1.9%, just below 2.0% official targets.

On Wednesday, the BLS data (SA) also shows the sequential (m/m) US core CPI rose 0.2% in February’25 from 0.4% in the preceding month (at a 10-month high) and below the market expectations of 0.3%. Fed needs an average sequential core CPI rate of around 0.15% consistently for 2.0-2.3% core CPI targets in the longer/medium term, but it stalled at 0.3% in the last three months. Overall, the 2024 average was 0.3% against 0.3% in 2023, 0.5% in 2022, and 0.1% in 2019 (pre-COVID).

The U.S. Core service inflation (w/o energy service) edged down to 4.1% in Jan’25 from 4.3% sequentially and is still substantially above pre-COVID December’19 levels of 3.0%. The Fed is now closely focusing on core service inflation, which is still quite elevated and sticky led by Shelter/Housing inflation amid higher demand for housing an increasing number of immigrant workers (increasing population), and the legacy issue of lack of adequate supply of affordable housing in the US.

Unlike China, the US is not able to create affordable housing (PPP model/private/public), smart cities, and high-speed railways for the increasing population due to a lack of political bipartisan consensus between Democrats and Republicans. The US has been suffering long from political & policy paralysis to increase the supply capacity of the economy (both social and traditional infra) to meet increasing demand and balance inflation.

Moreover, now homeowners are not ready to accept lower rent due to higher demand and higher borrowing costs (home/mortgage loans). And so far, President-Elect Trump’s election campaign promises didn’t share any meaningful plan to ensure more supply of affordable houses (like Democrats) as Trump may be more interested in the premium housing segment as Trump himself is a big building developer/promoter before becoming US President. In this way, the US affordable housing sector may be now facing an imminent recession like the sub-prime crisis during the 2008 GFC amid higher cost of living, higher cost of borrowing, and a slowing labor market. There are reports that US landlords are defaulting on their home loans.

 

The US Shelter inflation edged down to 4.2% in February’25 from 4.4% sequentially, and the lowest since December’21, but still substantially above pre-COVID (Dec’19) levels of +3.2%.

In February’25 the BLS data also shows the US super core CPI inflation (w/o food, fuel/energy, shelter/housing, used cars & trucks) rose at 2.2%, down from 2.4% in the last three months, but still substantially higher than December’19 (pre-COVID price stability) levels of +1.7%.

In February’25, the annual US core CPI inflation was boosted by apparel, medical care products & services, alcoholic beverages, tobacco & smoking products, shelter, and used cars & trucks and transportation services, while dragged by new vehicles. Other indexes saw also increases including motor vehicle insurance (+11.1%), medical care (+2.9%), recreation (+1.8%), and education (+3.7%).

On Wednesday, the BLS data (NSA) also showed the annual (y/y) US total CPI inflation edged down to 2.8% in February’25 from 3.0% sequentially, below the median forecasts of 2.9% and still much above the pre-COVID (December’19) levels of 2.3%, which is also the actual target of Fed. The US food inflation edged up to 2.6% from 2.5% sequentially, while energy inflation fell by 0.2% against 1.0% sequentially (after five consecutive months of decline). The US food inflation was around +1.8% in December’19 pre-COVID days, while energy inflation was around +3.4%, and total CPI (headline inflation) was +2.3%, at the Fed’s target and equivalent to total PCE inflation +1.5%.

Overall, the 3MRA of US CPI inflation was 2.9% in February’25. The 2024-average US CPI was 3.0% against a yearly average of 4.1% in 2023 and 2.3% in 2019 (pre-COVID); officially the US Congress has given Fed price stability mandate of 2.0% CPI inflation on a sustainable basis; not core CPI or core PCE and even total PCE inflation.

However, the Fed usually takes the average of core PCE and core CPI inflation for any policy stance as core inflation generally gives a fair picture of underlying inflation (without volatile fuel/energy and food inflation); also there is always a difference of around 50-100 bps between core CPI and core PCE inflation. But ordinary Americans are now concerned with higher cost of living expenses, which is total CPI.

Overall, the US total CPI is now around 27% higher than pre-COVID Jan’19 levels (6-years) against the normal run rate of 15% (@2.0-2.5% per year). Higher cost of living and higher input costs for SMEs were some of the primary economic factors behind the anti-incumbent wave against the Biden-Harris admin and Trump’s win in the November’24 election. Ordinary Americans to Trump and other influential politicians, all are now concerned about surging egg/food prices as elevated & sticky food inflation is enough to topple any incumbent government in Power (in any electoral democracy).

On Wednesday, the BLS data (SA) also showed the sequential (m/m) US CPI edged up to 0.2% in February’25 from 0.5% in the prior month, below median market expectations of +0.3%. The 3MRA of sequential CPI was 0.4% in February’25.

The February’25 sequential/monthly inflation was boosted by a 0.3% increase in shelter costs, while dragged by a 4.0% drop in airline fares and a 1.0% decline in gasoline prices. Food prices were up by 0.2%, driven by food away from home (0.4%) and egg prices (10.4%). Additional upward pressure came from medical care, used cars and trucks, household furnishings and operations, recreation, apparel, and personal care. Shelter costs moved up 0.3%, less than in January but still responsible for about half the monthly increase in CPI. The index for meats, poultry, fish, and eggs rose 7.7 percent over the last 12 months as the index for eggs increased 58.8 percent due to supply shortages driven by bird flu.

Overall, the 3MRA of US sequential CPI was 0.4%, the 2024 average was 0.2% against 0.3% in 2023, 0.5% in 2024 and 0.2% in 2019.

However, on Friday (14th March 25), the University of Michigan’s flash data shows the UM/US consumer sentiment index plunged to 57.9, the lowest since November 2022, while 1Y inflation expectations jumped to 4.9% in March (from 4.3%) and the highest since November’22,  reflecting concerns over Trump trade war tantrum.

The University of Michigan (UM) comments about US consumer sentiment and inflation expectations in March’25:

“Consumer sentiment slid another 11% this month, with declines seen consistently across all groups by age, education, income, wealth, political affiliations, and geographic regions. Sentiment has now fallen for three consecutive months and is currently down 22% from December 2024.

While current economic conditions were little changed, expectations for the future deteriorated across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions, and stock markets. Many consumers cited the high level of uncertainty around policy and other economic factors; frequent gyrations in economic policies make it very difficult for consumers to plan for the future, regardless of one’s policy preferences.

Consumers from all three political affiliations are in agreement that the outlook has weakened since February. Despite their greater confidence following the election, Republicans posted a sizable 10% decline in their expectations index in March. For Independents and Democrats, the expectations index declined an even steeper 12 and 24%, respectively.

Year-ahead inflation expectations jumped up from 4.3% last month to 4.9% this month, the highest reading since November 2022 and marking three consecutive months of unusually large increases of 0.5 percentage points or more. This month’s rise was seen across all three political affiliations. Long-run inflation expectations surged from 3.5% in February to 3.9% in March. This is the largest month-over-month increase seen since 1993, stemming from a sizable rise among Independents, and followed an already-large increase in February.”

In summary, most of the US consumers irrespective of political affiliations are now quite worried about Trump's policy tantrum and expect a higher cost of living in the coming days. Thus we may see subdued consumer spending and muted core real GDP growths in the coming quarters. Trump’s bellicose policies on tariffs, techs, immigration, deportations, Federal austerity & layoffs, and deregulations may affect US price stability and employment and thus both Wall Street and Real Street are now quite worried and confused. Trump’s policy uncertainty may affect the US core real GDP (Private consumption and investments), and cause higher inflation and unemployment. In that stagflation-like scenario, the Fed’s soft landing narrative may be in jeopardy and both Wall Street and Real Street are tightening seat-belt for a possible hard or crash landing of the economy.

Analysis:

The Federal Reserve, which targets a 2% inflation rate (typically measured by the Personal Consumption Expenditures (PCE) price index, is likely to view the February CPI report as a sign of modest progress after the usual January 25 surge due to seasonal issues.

However, both headline (2.8%) and core (3.1%) inflation remain much above the Fed’s target, and the potential inflationary impact of tariffs complicates the outlook. Shelter costs, though easing, continue to exert significant influence, while volatile categories like egg prices highlight persistent supply-side challenges. Market reactions were positive, with stock futures rising and Treasury yields increasing following the release, reflecting relief over the softer-than-expected data and hopes of a less hawkish Fed stance in the coming days.

Overall deflationary trend is providing the Federal Reserve (Fed) with room to maintain current interest rates as it assesses the economic impact of Trump’s trade, tariffs, techs, immigration, deportations, and deregulation policies. However, the narratives of new tariffs by the Trump administration have raised concerns about potential future inflationary pressures. ​As of February’25, Trump imposed 10% additional tariffs on China, but its effect on imported and total CPI inflation was not visible due to huge imports from China and other vulnerable exporters to beat Trump tariffs.

The Jan’25 surge in core and total CPI was in line with past trends and more of a transient seasonal rather than a structural issue. Now in February’25, it was normalized. The Fed does not make any important policy decision based on a single month's economic data. Fed considers at least a 3M rolling average (3MRA) of core inflation and unemployment data for any policy decision.

This moderation of inflation in February’25 signals a cooling of inflationary pressures, offering some relief to consumers and policymakers amid concerns over potential tariff-related price increases or Trumpflation. The February 2025 CPI inflation data reflects a broader trend of decelerating inflation, providing temporary respite after a hotter-than-expected January report (headline CPI at 3.0% YoY and Core CPI at 3.3% YoY).

This cooling comes amidst heightened economic uncertainty driven by President Trump’s tariff policies, initiated in early February 2025, including a 20% tariff on Chinese goods and a 25% duty on Canadian and Mexican imports (with a one-month exemption for certain goods). While the February data does not fully capture the impact of these tariffs, the market anticipates upward pressure on prices in the coming months as supply chain adjustments and increased costs transmissions through to consumers. Early tariff effects may be emerging (e.g., apparel and home furnishings), with broader impacts expected in future reports; it may take a minimum of 3-6 months for transmission of higher input costs into higher MRP for consumers/end users.

However, the February’25 inflation moderation offers a reprieve from January’s elevated readings and aligns with a broader disinflationary trend. However, persistent pressures from shelter, food, and emerging tariff-related costs suggest that inflation remains a challenge. The Federal Reserve (Fed) is expected to maintain its current interest rate stance at the March 18-19, 2025, meeting, adopting a wait-and-see approach as it assesses tariff impacts and labor market conditions. While the February report is encouraging, the path to the Fed’s 2% target remains bumpy, with trade and immigration policy uncertainty posing a significant risk to future inflation trajectories.

Conclusions:

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, US Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate.

In March’25, the Fed may also share some concrete plans to end the QT, which may be positive for UST and negative for US bond yields, USD. Fed is now cutting rates while doing QT, which is two contra monetary policy tools. As a result, bond yields remain elevated at around 4.50% and the real economy may not be getting the full effect of a 100 bps rate cut in 2024. The market usually discounts Fed rate cuts well in advance in line with regular Fed talks and official dot plots.

Thus Fed may close the QT first by June’25 at B/S size around $6.60-6.50T from present levels of around $6.89T. Fed may keep the B/S size around 22% of projected nominal GDP around $30T by 2025, which may be an ideal level for the Goldilocks nature of the US economy and may not cause another REPO/Funding market crisis as we have seen late 2019 under Trump and Powell-1.0.

Bottom line

To fight a highly probable US stagflation or even recession-like economic situation amid the Trump trade war tantrum, the Fed may first close QT by June’25 and also resume the rate cut cycle for 50 bps cumulative in 2025. Fed may provide a definitive plan to end the QT in its March’25 meeting and close the same by June’25 and cut rates by 25 bps each in June and December’25. But if the concern of a Trumpcession intensifies further and the employment situation deteriorates meaningfully (unemployment surges over 4.5%), the Fed may also cut another 25 bps in September’25. At the present run rate and any potential impact of moderate Trump trade war after H1CY25, the US core inflation may dip towards 2.0% targets by mid to late 2026.

Market Wrap:

On Wednesday (12th March 25), Wall Street Futures were buoyed by hopes of a less hawkish Fed stance after a softer-than-expected US core CPI inflation report, and also the progress of the Ukraine war ceasefire, while undercut by the Trump trade war tantrum.

On Friday (14th March 25), the risk trade Sentiment improved amid signs lawmakers in Washington will successfully avert a government shutdown. Meanwhile, the market remains focused on escalating Trump trade war tensions and its potential impact on Wall Street and also Real Street. The US market is now fully controlled by Trump’s morning moods, whims & fancies, and Truths; not economic data and Fed comments. On late EU Friday, Dax Future also recovered from earlier US-EU escalated trade war panic low on the progress of the German debt deal.

On Friday, the S&P 500 jumped 2.1%, the Dow Jones-30 popped 674 points, and the Nasdaq 100 rose 2.5%. Easing fears of an imminent government shutdown and progress of Ukraine war ceasefire talks helped lift markets. Senate Minority Leader Chuck Schumer signaled support for a Republican-backed funding bill, reducing political and policy uncertainty. Tech stocks led the rebound after the last few day's plunge, led by Nvidia while Tesla, Meta, Amazon, and Apple. Palantir also jumped, defying concerns over potential defense spending cuts. Despite Friday’s gains, the S&P 500 and Nasdaq-100 fell over 2% each for the week, while the Dow posted a 3.1% decline—its worst weekly performance since March 2023.

On Friday, Wall Street was boosted by short covering and value buying of all major sectors led by techs, energy, banks & financials, consumer discretionary, communication services, utilities, real estate, healthcare and consumer staples. Dow Jones (DJ-30) was boosted by NVIDIA, American Express, JPM, Goldman Sachs, 3M, Salesforce, Microsoft, Chevron, Amazon, and Caterpillar, while dragged by Nike, P&G, Verizon, Merck & Co, J&J, and Sherwin.

Weekly-Technical trading levels: DJ-30, NQ-100, Gold and Dax

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 43850) now has to sustain over 44050 for any further rally to 44250/44400-44500/44800 and 45000/45200-45300/45500 and 45700/45800-45900/46000 in the coming days; otherwise sustaining below 44000, DJ-30 may again fall to 43800/43675-43300/43150 and 42800/42700-42000/41900 in the coming days.

Similarly, NQ-100 Future (20915) has to sustain over 21050 for a further rally to 21300/21500-21700/21850 and 22050/22200-22350/22500 and 22700/23000-23300/23500 in the coming days; otherwise, sustaining below 21000, NQ-100 may again fall to 20900/20600-20400/20150 in the coming days.

Technically, DAX-40 (22500) now has to sustain over 22700 for a rally to 22800/22/900-23000/23500 and 23600/23700-23800/24000; otherwise, sustaining below 22650/22550, may again fall to 22250/21850-21700/21100 and 20800/20000-19700/19000-18850 in the coming days.

Also, technically Gold (CMP: 2985) has to sustain over 3005-3010 for a further rally t 3025/3060-3075/3100 and 3125/3150-3200/3225; otherwise sustaining below 3000-2995, Gold may again fall to 29650/2925-2900/2880 and 2850/2835-2810/2780-2780 and 2745/2725-2695/2665 and further 2635/2600-2585/2560 in the coming days.