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US inflation fell more than expected to 2.8 per cent in February, bolstering the case for the Federal Reserve to cut interest rates amid signs of slowing growth in the worldโs largest economy.
Wednesdayโs annual consumer price index figure was below Januaryโs 3 per cent and the 2.9 per cent expected by economists, according to a Reuters poll.
US stocks opened higher, but the gains fizzled later in the trading session, leaving the blue-chip S&P 500 slightly lower on the day.
Futures markets are pricing in two rate cuts this year with a roughly 85 per cent chance of a third โ up marginally from before the data release.
The US central bank faces a difficult balancing act as it tries to bring down inflation without triggering a recession, amid intensifying fears that President Donald Trumpโs aggressive economic agenda is hampering growth.
Businesses and financial markets have been rattled by the chaotic rollout of Trumpโs tariffs on the USโs biggest trading partners, which has been marked by a series of sudden escalations and U-turns.
Wednesdayโs figures showed that core inflation rose 3.1 per cent, falling short of expectations of a 3.2 per cent increase.
โUnderlying inflation is slowing before we get to those upside risks of tariffs, which will come later in the spring, so thatโs positive for the Fed,โ said Veronica Clark, an economist at Citigroup. โThat will make them less worried about planning cuts later in the year.โ
Last week, Fed chair Jay Powell played down concerns over the health of the US economy after the S&P 500 indexโs post-election gains were wiped out following the release of disappointing employment figures for February.
Powell suggested that he expected the central bank to hold interest rates at their current range of between 4.25 per cent and 4.5 per cent at its meeting next week, saying the Fed was in no โhurryโ to cut and was โfocused on separating the signal from the noise as the outlook evolvesโ.
On Wednesday the Bank of Canada cut interest rates by a quarter point to 2.75 per cent, citing the expected slowdown from โheightened trade tensions and tariffs imposed by the United Statesโ.
Although it said the Canadian economy had begun the year in good shape, the BoC also noted slowing economic activity in the US and warned that its own outlook was harder to fathom as a result of โmore-than-usual uncertainty because of the rapidly evolving policy landscape.โ
Some economists and investors fear that Trumpโs tariffs will stoke US inflation, with the price of several metals, including aluminium, rising after the administration imposed steep tariffs on imports from Wednesday.
The move from the White House to impose 25 per cent levies on all steel and aluminium imports triggered swift retaliation from the EU, which is targeting up to โฌ26bn of US goods with tariffs.
Tom Porcelli, chief US economist at PGIM Fixed Income, said that Februaryโs drop was welcome but said investorsโ relief could prove shortlived given the possible impact of tariffs.
In February, sectors registering the biggest price increases included medical care and used cars, while airfares and new cars were among those where costs declined.
Egg prices, a significant contributor to Januaryโs strong reading, were higher again in February, rising a further 10 per cent on the month for an annual increase of 59 per cent.
โItโs good news, for sure, but I do think we donโt want to overstate this,โ said Ryan Sweet, chief US economist at Oxford Economics. โOnly the tariffs on China had gone into effect in February and it may be a bit too soon to be captured in this round of data.โ
