Inflation eased in February with CPI rising just 0.2%, below expectations. However, economic concerns persist as Trump's 25% tariffs on steel and aluminum triggered global retaliation, raising trade war fears. This complicates the Fed's policy path, as they balance slowing growth against inflation risks. Goldman Sachs has cut 2025 growth forecasts while raising inflation projections.

Slowing Inflation Brings Relief, But Is the Worst Yet to Come?

According to the report released by the U.S. Bureau of Labor Statistics on Wednesday, the Consumer Price Index (CPI) recorded its slowest increase in four months in February. The all-items index rose by 0.2% after a sharp 0.5% increase in January, coming in below economists' expectations of 0.3%. On a year-over-year basis, price increases eased to 2.8%.

The so-called core measure, which excludes volatile food and energy categories, also rose by 0.2% on a monthly basis, while the annual increase slowed to 3.1% from the previous 3.3%.

According to the BLS report, the shelter index increased by 0.3%, accounting for nearly half of the monthly rise in the all-items index. While the annual increase slowed to 4.2%, shelter costs remain persistently high.

The food index, which had risen by 0.4% in January due to the impact of bird flu, slowed to a 0.2% increase in February. Egg prices, which had led the previous month's increase, rose by only 1.6%.

Meanwhile, the energy index edged up by 0.2% following a 1.1% increase in January, as gasoline prices declined. On an annual basis, the energy index fell by 0.2%.

Some economists had expected to see early signs of the impact of newly imposed tariffs on Chinese imports in this report. However, while prices of goods rose modestly, categories related to Chinese imports remained relatively stable. Still, many economists caution that this report does not provide a definitive outlook for the future, and the risk of tariffs fueling inflation remains a concern.

Trump's Metal Tariffs Spark Global Backlash, Raising Trade War Fears

The 25% tariffs imposed by Donald Trump on steel and aluminum imports officially took effect on Wednesday. As markets anticipate further tariff measures in April, other countries have already begun to respond with countermeasures.

Just hours after the metal tariffs came into effect, the European Union announced it would impose tariffs on $26 billion worth of U.S. goods, including steel, aluminum, and other industrial products, to match the economic impact of Trump's measures.

A day earlier, Trump had threatened to raise tariffs on Canadian steel and aluminum to 50%. However, he backed down after Canada withdrew its plan to impose additional charges on U.S. electricity imports. Nevertheless, Canada responded with its own set of countermeasures, announcing additional tariffs on C$12.6 billion worth of steel products, C$3 billion worth of aluminum, and C$14.2 billion worth of other goods.

Meanwhile, Mexico, another country significantly affected by the tariffs, has maintained a cautious approach. President Claudia Sheinbaum has indicated that Mexico will wait until April before deciding on any retaliatory tariffs and will continue negotiations in the meantime.

With retaliatory measures intensifying, global economies are edging closer to a full-blown trade war. However, Trump shows little sign of softening his stance, warning that the EU's countermeasures will not go unanswered.

Although the steel and aluminum tariffs apply globally, most countries outside the EU and Canada have opted to remain on the negotiating side for now. However, if Trump proceeds with broader reciprocal tariffs in April, other countries may be forced to take countermeasures, potentially escalating a global trade war.

Sticky Inflation Meets Growth Risks: Trade War Complicates the Fed's Path

The softer-than-expected February inflation figures provided some relief to markets concerned about rising inflation. However, economists continue to warn that the escalating trade war poses an upside risk to prices in the coming months.

Goldman Sachs economists lowered their 2025 U.S. growth forecast this week from 2.4% to 1.7%, while raising their inflation projection—measured by the PCE index—by 0.50 percentage points to 3%. They argue that tariffs will push price levels higher and that the Federal Reserve's anticipated two quarter-point rate cuts this year could further fuel inflation.

If inflation begins to deviate from the Fed's target while economic growth slows, policymakers could face difficult decisions in the months ahead. Swap traders continue to price in three quarter-point rate cuts this year. However, some economists believe recession fears may be exaggerated and that pricing in three cuts appears overly aggressive.

As Duhani Capital Research team, we assess that consumer spending may remain weak amid worsening financial conditions for U.S. households and rising uncertainties. This could weigh on economic growth while also tempering inflationary pressures, potentially keeping the Fed on an easing path. However, given policymakers' post-pandemic expectations that the neutral rate—the rate that neither stimulates nor restricts the economy—has risen, they may be hesitant to implement aggressive easing. Unless the labor market weakens significantly, justifying such a move could be challenging.

Key Economic Data Under Scrutiny Ahead of Fed Projections

Looking ahead, recession concerns may continue to pressure markets amid an escalating trade war. As doubts over U.S. economic resilience grow, traders are adjusting their positions against the U.S. dollar, while economists revise their dollar forecasts downward. At the same time, rising global uncertainties are driving investors toward safe-haven assets, pushing up gold and other precious metals.

Later today, the release of producer price index (PPI) data could provide insight into key categories that directly impact the Fed's preferred inflation gauge, the PCE index, and influence market expectations. Economists forecast that core producer inflation, excluding food and energy, remained steady at 3.6% in February, while the all-items index slowed to 3.3%.

Additionally, traders will closely watch Friday's five-year consumer inflation expectations survey's preliminary results. While short-term inflation expectations have surged to multi-year highs in recent surveys, long-term expectations are a more critical indicator for the Fed. This data will also serve as one of the last key economic inputs before Fed officials update their projections next week.