US Feb-25 inflation tapers to 2.8%, led lower by core inflation

17 Mar 2025 , 09:39 AM

INFLATION EASES 20 BPS, BUT TRUMP EFFECT STILL TO MANIFEST

In the last 6 months, the consumer inflation in the US has gradually moved up from  2.0% to 3.0%. While inflation has tapered to 2.8% in February 2025, it is apparent that the impact of higher Trump tariffs and immigration restrictions are not yet factored into inflation. At 2.8% in February 2025, the consumer inflation in the US stays a full 80 bps above the Fed target of 2%. We have to await the impact of the higher tariffs on inflation, but it is estimated that the impact could be anywhere between 30 bps and 50 bps. That may make the FOMC cautious about rate cuts, despite a 20 bps relief this month. Specifically, considering that the Fed has already cut rates by 100 bps in the last Fed 3 policies of 2024.

FOOD HIGHER, BUT ENERGY AND CORE INFLATION EASE IN FEB-25

A modest spike in food inflation, was more than offset by a fall in energy inflation and core inflation in February 2025. The yoy inflation and MOM inflation were meaningfully lower.

Inflation Basket Category	Feb 2025 (YOY)	Inflation Basket Category	Feb 2025 (YOY)
Food Inflation	2.60%	Core Inflation	3.10%
Food at home	1.90%	Commodities less food and energy	-0.10%
·         Cereals and bakery products	0.30%	·         Apparel	0.60%
·         Meats, poultry, fish, and eggs	7.70%	·         New vehicles	-0.30%
·         Dairy and related products	0.80%	·         Used cars and trucks	0.80%
·         Fruits and vegetables	-0.20%	·         Medical care commodities	2.30%
·         Non-alcoholic beverages	2.10%	·         Alcoholic beverages	1.70%
·         Other food at home	0.10%	·         Tobacco and smoking products	6.60%
Food away from home	3.70%	Services less energy services	4.10%
·         Full service meals and snacks	3.70%	Shelter	4.20%
·         Limited service meals	3.50%	·         Rent of primary residence	4.10%
Energy Inflation	-0.20%	·         Owners’ equivalent rent	4.40%
Energy commodities	-3.20%	Medical Care Services	3.00%
·         Fuel oil	-5.10%	·         Physician Services	2.60%
·         Gasoline (all types)	-3.10%	·         Hospital Services	3.60%
Energy services	3.30%	Transport Services	6.00%
·         Electricity	2.50%	·         Motor vehicle Maintenance	5.80%
·         Natural gas (piped)	6.00%	·         Motor vehicle insurance	11.10%
Headline Consumer Inflation	2.80%	·         Airline Fare	-0.70%

Data Source: US Bureau of Labour Statistics

In the US, the CPI inflation acts as a lead indicator for PCE inflation, which sets the tone for Fed rate action. Here is what we read.

• Food inflation in February at 2.6% saw upward pressure from high protein basket of eggs & meat and non-alcoholic beverages; while fruits and vegetables saw prices tapering.
• Energy inflation moderated by 120 bps to -0.2% in Feb-25. The price of gasoline fell sharply in tandem with the global crude prices falling on demand concerns.
• Core inflation eased 20 bps to 3.1%? The downside pressure on core inflation came from medical care expenses and airline fares.

While headline CPI inflation for Feb-25 has eased 20 bps to 2.8%, the gap of 80 bps from the target and the potential impact of tariffs remain risk factors.

FEBRUARY 2025 MOM INFLATION MODERATES TO 0.2%

Here is the month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Sep 2024	0.4%	(1.9%)	0.3%	0.2%
Oct 2024	0.2%	0.0%	0.3%	0.2%
Nov 2024	0.4%	0.2%	0.3%	0.3%
Dec 2024	0.3%	2.6%	0.2%	0.4%
Jan  2025	0.4%	1.1%	0.3%	0.5%
Feb  2025	0.2%	0.2%	0.2%	0.2%

Data Source: US BLS (negative figures in brackets)

The headline MOM inflation has eased by 30 bps to 0.2%; and is back to the levels seen in September and October 2024. Interestingly, there has been a moderation across food inflation, energy inflation and core inflation, when looked at from a high frequency lens. While the food MOM inflation was led lower by dairy products, it was gasoline in the case of energy inflation. In the core basket, the downside support came largely from airline fares. Clearly, there seems to be a positive story on high frequency inflation.

CME FEDWATCH – MORE OPTIMISTIC ABOUT RATE CUTS

Here is how the CME Fedwatch (based on implied probabilities in Fed Futures trades) probabilities look like after Jerome Powell’s testimony to the Congress.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Mar-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	1.0%	99.0%
May-25	Nil	Nil	Nil	Nil	Nil	Nil	0.3%	28.6%	71.1%
Jun-25	Nil	Nil	Nil	Nil	Nil	0.2%	18.6%	56.0%	25.2%
Jul-25	Nil	Nil	Nil	Nil	0.1%	7.4%	33.3%	43.9%	15.3%
Sep-25	Nil	Nil	Nil	Nil	4.9%	24.4%	40.3%	25.1%	5.2%
Oct-25	Nil	Nil	Nil	1.7%	11.6%	29.9%	35.1%	18.3%	3.4%
Dec-25	Nil	Nil	0.7%	5.5%	18.7%	31.9%	28.6%	12.6%	2.1%
Jun-26	0.1%	0.8%	3.8%	12.1%	23.9%	29.2%	21.0%	8.0%	1.2%
Dec-26	1.2%	4.2%	11.7%	21.7%	26.6%	20.9%	10.2%	2.9%	0.5%

Data source: CME Fedwatch

After the recent fall in inflation, the probability of rate cuts has gone up, although markets do not see any likelihood of rate cut in the 18-March meeting.

• By Jun-25, probability of minimum 25 bps rate cut has gone up sharply to 74.8%.
• By Dec-25, probability of minimum 50 bps rate cut has gone up sharply to 85.3%.
• By Jun-26, probability of minimum 75 bps rate cut has gone up sharply to 69.8%.
• By Dec-26, probability of minimum 100 bps rate cut has gone up sharply to 65.5%.

It may still be early days to project 2026 probabilities, but the CME Fedwatch is expecting the Fed to be more liberal with rate cuts. More so, amidst falling inflation and the risk of an economic slowdown caused by Trump tariffs!