WSJ: US Inflation Decline Is Not Reassuring Enough

While the latest US Labor Department data showed a decline in inflation rates last month, these figures may not be reassuring enough for businesses, consumers, and Federal Reserve policymakers, given the potential for tariffs to raise prices for some goods in the coming months, according to the Wall Street Journal.

The Labor Department reported that consumer prices rose 2.8% in February compared to the previous year, down from 3% in January. Consumer prices also fell short of expectations, with forecasts of 2.9%.

Core inflation, which excludes food and energy, rose to 3.1%, the lowest annual reading since 2021. The American newspaper noted that core inflation is what economists monitor to understand the long-term trend or underlying underlying inflation, rather than temporary fluctuations or short-term factors. However, the Wall Street Journal, in a report, noted warnings from analysts that the encouraging inflation reading is not enough to offset the uncertainty caused by the tariffs. The newspaper added that US Federal Reserve policymakers may not be as reassured by this data as investors had hoped, as the data indicates that inflation remains above the central bank’s 2% target.

However, the newspaper stated that this data is unlikely to change the Federal Reserve’s decision to keep interest rates steady when policymakers meet next week.

It explained that the Federal Reserve follows a separate price measure, the Core Personal Consumption Expenditures Index (CPE) issued by the Commerce Department. The newspaper cited warnings from economists that the Labor Department’s lower inflation reading may not reflect the Commerce Department’s reading. This is because some of the data used by the Commerce Department comes from separate sources. The newspaper pointed out that interest rate futures contracts, financial tools used to predict future interest rate trends and hedge against changes, showed that the chances of the Federal Reserve resuming interest rate cuts by its June policy meeting are slightly lower than they were before the inflation data was released.

It noted that if tariffs keep inflation high, they could limit the Fed’s ability to cut interest rates quickly at any signs of economic weakness, as policymakers may fear that their attempts to prevent a potential slowdown will increase upward pressure on inflation.

The Wall Street Journal reported that tariffs aren’t the only issue raising concerns about inflation. There are also people’s thinking and expectations about inflation. It explained that when inflation began to rise sharply in 2021 and 2022, people’s inflation expectations didn’t rise much, which was good news for the Federal Reserve.

It added that when people and businesses anticipate more inflation, they can pressure wages and prices to rise before it happens, which can become a self-fulfilling prophecy. This could create additional challenges for the Federal Reserve, especially in light of all the news surrounding tariffs.

The newspaper quoted Carola Binder, an economist at the University of Texas, as saying that food prices, like gasoline prices, are highly volatile and therefore excluded from core inflation measures. But they can also play a crucial role in how people think about inflation. She added, “People know the price they’re used to paying, so price changes are very visible.”

Binder added that having recently experienced such a large wave of inflation, consumers will be more aware of the situation. It will be difficult to convince them that any price increases, which policymakers describe as temporary, are in fact temporary.