Inflation dropped from 3% to 2.8% for the year ending in February, the Bureau of Labor Statistics reported Wednesday, a sign that price pressures are abating and might not be among the top economic risks facing the new Trump administration.
Most economists had predicted that the consumer price index would fall a tenth of a percentage point after increasing for four straight months. The decrease is good news for President Donald Trump, who is grappling with rising fears of a recession as he launches a multifront trade war.
On a month-to-month basis, inflation was 0.2%.
This CPI report was hotly anticipated, given that inflation has been unexpectedly sticky. Trump vowed to lower inflation on the campaign trail and entered office, in part, because of that commitment. If inflation doesn’t begin to fall meaningly, Democrats will seize on the opportunity to criticize him.
Core CPI inflation, which strips out volatile food and energy prices, fell by two-tenths of a percentage point to 3.1% for the year ending in February.
Greg McBride, chief financial analyst for Bankrate, said the February report “showed the type of progress on inflation that has been missing over the past several months.”
Still, he noted, rising prices are putting pressure on household budgets, including for car insurance, electricity, and natural gas.
Shelter costs were the biggest driver of inflation in February, with the index for shelter rising 0.3% last month. It accounted for nearly half of the monthly all-items inflation increase, according to the Bureau of Labor Statistics.
Some of the higher shelter costs were offset by a 4% decline in airline fares and a 1% drop in gasoline prices last month. The overall energy index still rose 0.2% despite gas prices moving lower in February.
Officials at the Federal Reserve are watching the inflation numbers closely to determine whether to lower interest rates further to spur more economic activity or to forgo further rate cuts to try to tamp down inflation.
The Fed cut rates by a whole percentage point last year. As inflation proved difficult to subdue, though, the central bank opted to hold interest rates steady at its January meeting.
The Fed’s goal is 2% annual inflation.
Trump has plowed ahead with tariff plans recently, which has caused economic uncertainty to rise and the stock market to post major losses. There are also indications of a slowdown in economic growth, and economists have said the odds of a recession are rising.
The Dow Jones Industrial Average has dropped more than 7% over the past month. Some on Wall Street thought Trump might have been bluffing about tariffs on Canada and Mexico, but some of those have been allowed to go into effect.
But in a worrying sign, the Atlanta Fed’s “GDPNow” tracker predicts that GDP growth in the first quarter will fall by 2.4%, according to the latest estimate.
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The big question is when the Fed will next cut interest rates. If the economy starts to deteriorate further, it could prompt the central bank to move the cuts forward to spur growth, but that is also challenging because inflation still hasn’t fallen to healthy levels.
The Federal Open Market Committee meets next week to decide what to do with interest rates. During its last meeting in January, the central bank opted to pause rate reductions amid the persistently high inflation.
