LDN - Business

US inflation may have slowed slightly last month but tariffs threaten reversal

[March 12, 2025] By CHRISTOPHER RUGABER

WASHINGTON (AP) — U.S. inflation may have cooled a bit last month but it could be a short reprieve as President Donald Trump's tariffs are widely expected to keep prices elevated in the coming months.

On Wednesday, the Labor Department is expected to report that in February the consumer price index rose 2.9% from a year ago, according to economists surveyed by FactSet. If so, that would be down slighly from 3% in January and the first drop in five months. It fell to a 3 1/2 year low of 2.4% in September.

Core prices, which exclude the volatile food and energy categories, are also expected to slip, down to 3.2% from 3.3% in January. Economists watch core prices closely because they often provide a better read on where inflation is headed.

Even if the expected declines occur, both figures will still have largely been stuck at the same levels since last summer, when the improvement in inflation largely stalled after a steep drop from a peak of 9.1% in June 2022. If price increases stay stubbornly high, that could create political problems for Trump, who promised as a candidate to “knock the hell out of inflation."

And with Trump imposing — or threatening to impose — a wide range of tariffs on imports from Canada, Mexico, China, Europe and India, most economists forecast price growth will likely remain elevated this year.

“There's no real progress toward that 2% goal,” Dan North, senior economist at Allianz Trade Americas, a financial services firm, said. “I suspect that you're going to start seeing inflation numbers go the other way.”

Wednesday's figures are unlikely to move the inflation-fighters at the Federal Reserve much closer toward cutting their key interest rate, which they reduced three times last year amid signs inflation was continuing to fall. Fed Chair Jerome Powell said the rate cuts were on pause in January and a cut is highly unlikely at the Fed's meeting next week.

On a monthly basis, both headline and core prices are projected to have risen 0.3% in February from the previous month. That would be an improvement from January, when overall inflation spiked 0.5%, but increases at that pace are still too large to get inflation on a yearly basis back to the Fed's 2% target.

The biggest wild card for the Fed — and the economy as a whole — are the tariffs and Trump's threats to impose more. Since his inauguration in January, Trump has imposed 20% taxes on all imports from China, and 25% duties on imports from Canada and Mexico, though most of those tariffs have been suspended for a month.

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On Wednesday, the administration will slap steel and aluminum imports with 25% duties, which could push up prices for a range of goods, including cars, appliances and electronics. And on April 2 Trump has said he will impose reciprocal duties on countries that tariff exports from the United States, including Europe, India, and South Korea.

The duties have roiled financial markets and could sharply slow the economy, with some analysts raising the odds of a recession.

Economists at the Yale Budget Lab calculate that the reciprocal tariffs, by themselves, could boost the average U.S. tariff rate to its highest level since 1937, and cost the average household as much as $3,400.

Aside from the tariffs, some items, such as eggs, are expected to have gotten even more expensive last month, pushing inflation higher. Avian flu has forced farmers to slaughter more than 160 million birds, including 30 million just in January, in an attempt to contain the outbreak. Average egg prices hit $4.95 a dozen nationwide in February, a record high. The price had consistently been below $2 a dozen for decades before the disease struck.

Economists will also closely watch the prices of new and used cars, auto insurance, airline tickets, and rents, among other items, to get a broader sense of where inflation may be headed. Gas prices are expected to have fallen last month.

Tariffs, according to economics textbooks, are generally expected to result in just a one-time increase in prices, but not necessarily ongoing inflation. Treasury Secretary Scott Bessent made that case in remarks at the Economic Club of New York last week, while acknowledging that prices might be higher.

“We could get a one-time price adjustment," he said. “Access to cheap goods is not the essence of the American Dream.”

But Fed Chair Jerome Powell noted on Friday that in some cases tariffs could worsen inflation — for example, if they were enacted as a “series” of price hikes that caused consumers to expect inflation to move higher.

“What really does matter is what is happening with long-term inflation expectations,” Powell added. Powell noted that shorter-term expectations have risen, partly out of concern about tariffs, though longer-term expectations have been stable.

Expectations that prices will rise can worsen inflation if they cause consumers and businesses to change their behavior in anticipation. Some companies might charge more when they expect their own costs to increase, for example.

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