Is February’s Tempered Pace the Calm Before the Inflation Storm?

The slight rise in consumer prices, as February’s report from the Bureau of Labor Statistics Wednesday (March 12) showed, may just be (relative) calm before the inflationary storm.

The Consumer Price Index (CPI) was 0.2% higher in February, as measured against January’s levels, and annualized inflation came in at 2.8%.  That’s a cooldown from the 0.5% pace in January (month on month) and the 3% annualized rate that kicked off the year.

But the February data do not take into account the 25% tariffs placed upon goods including steel and aluminum, and a countermeasure this week from the European Union, which slapped tariffs on U.S. farm and industrial items. In other words, the snapshot from February may be a “low water” mark for inflation.

The deeper dive into the actual expenses in the release and across various tables reveals that the shelter index rose 0.3% on a seasonally adjusted monthly basis and 4.2% over the past year, marking the smallest annual increase since December 2021. But shelter still represents a key driver of expenses — and it’s as essential an expense as any might be — and accounted for nearly half of February’s overall increase in CPI. Our data indicate that for consumers making less than $50,000 annually, shelter accounts for 36.7% of income; all told, the essentials of life — including food, housing and monthly expenses — can eat up more than 70% of take-home pay.

The food index increased 0.2% in February, with food away from home rising 0.4%, while food at home remained unchanged. Over the past year, the food at home index rose 1.9%, while food away from home increased 3.7%. Egg prices surged again, climbing 12.5% compared to January (seasonally unadjusted) following a 13.8% increase in January. Annually, egg prices have skyrocketed by 58.8%, the largest increase since January 2023. Other notable increases in February included cereals and bakery products (+0.5%) and meats, poultry, and fish (+0.2%). To be sure, the egg situation may prove to be short lived if the impact of avian flu can be blunted, but for right now choices must be made between what’s on the plate at breakfast and what’s stocking the pantry for other meals.

From January to February, real average hourly earnings for all employees rose by 0.1%.  Annually,  real average hourly earnings grew by 1.4%, and combined with a 0.3% decrease in the average workweek, this resulted in a 1.1% increase in real average weekly earnings.  The pressure is on, then, for wages to keep up with spending.

“Consumers across all income brackets are likely to pull back on spending, but for different reasons. Those with savings cushions may voluntarily push pause on spending until they have more certainty in order to preserve cash and income, while those without financial shock absorbers in the form of savings will be forced to cut back out of necessity,” Karen Webster wrote in a recent column observing the changes and challenges in the paycheck-to-paycheck economy, which incudes two-thirds of U.S. consumers. “High earners who have structured their lifestyles around their full income with minimal savings could face similar challenges to lower-income households when economic conditions tighten.”

 We’ll get a sense of how the pressures are coming to bear on consumers and individual households when retail sales data are released at the beginning of next week. In the meantime, February’s data is no sure sign that the inflationary beast has been tamed.

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