Kiplinger Inflation Outlook: Inflation Slows, but Tariff Effects Still to Come

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Headline inflation eased to 2.8% in February from 3.0% in January, and core inflation (which excludes food and energy costs) also slipped, to 3.1% from 3.3% in January. The reductions were a bit more than expected. Services prices excluding housing slowed to 0.1% growth, from 0.8% in January, which accounted for most of the slowdown. Airfares dropped 4.0%, as both aviation fuel and gasoline prices declined. Both shelter and medical services costs continued at a moderate rate of increase. Going forward, shelter costs should contribute less to inflation than they have in the previous four years. New-vehicle prices edged down, but used-vehicle prices rose for the sixth consecutive month. Average used-vehicle prices are now nearly back to where they were at the end of 2023, when there was a supply crunch. The price of groceries was unchanged, on average, despite a 10.4% rise in the price of eggs and a 2.7% pickup in the price of ground beef. Egg prices have soared 59% over the past 12 months, but appear to have turned a corner after declining at the beginning of March. The avian flu has severely reduced flocks at egg-laying chicken farms. The cost of dining out continued to rise at a moderately strong pace, and is up 3.7% over the past year.

Modest progress on inflation will please the Federal Reserve, but is unlikely to give the central bank enough reason to cut interest rates when it meets on March 19. The Fed will want to see the effects of tariffs on inflation over the next several months before acting.

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While news headlines focus on the Consumer Price Index, note that the Fed’s goal of 2% inflation is based on a measure called the personal consumption expenditures deflator, not the CPI. The PCE deflator tends to run about half a percentage point below the CPI these days. The PCE deflator excluding food and energy rose at a 2.6% rate for the 12 months ending in January, compared with the core CPI’s 3.3%. That lower number is still too high for the Federal Reserve’s 2% target.

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