US February-25 CPI Inflation report
Better than expected reading of CPI inflation in February 2025. Core services and and the rent of shelter component are still the main driver of overall inflation.
Key takeaways:
The overall Consumer Price Index (CPI, n.s.a.) increased by 2.8% year-on-year (YoY) in February, lower than the consensus expectation of 2.9% YoY and below January’s reading of 3.0% YoY.
Core CPI in February was 3.1% YoY (n.s.a.), below January’s reading of 3.3% YoY and the consensus forecast of 3.2% YoY.
Inflationary pressures are primarily concentrated in the core service sector, with an increase of 4.1 % YoY in February, below the 4.3% YoY observed in January. In contrast, the core goods sector (ex-energy and food) is experiencing deflation with a decrease of 0.1 % YoY, the same decrease as in January.
The primary factor behind recent inflationary pressures is still the rent of shelter component of the Consumer Price Index (CPI). Rent of shelter increased by 4.3% YoY in February, lower than the 4.4% YoY recorded in January. The month-on-month increase was 0.4% (n.s.a.) vs 0.5% in January.
The slow adjustment of core service inflation and its housing component are the key factors behind the lack of adjustment towards the 2% target. It is also interesting to note how core inflation is still above 3% YoY. The MoM readings showed encouraging improvements averaging 0.1% MoM in the last quarter of 2024 but jumped to 0.6% MoM (n.s.a.) in January and improved in February with a 0.4% MoM increase.
The next FOMC meeting is scheduled next week for March 18-19, and the Fed is expected to keep the funds rate unchanged. The latest data shows some improvement relative to expectations, but a sticky housing component is still driving overall inflation.
Related posts (with links)
U.S. January-25 CPI Inflation Report (previous release)
U.S. December-24 CPI Inflation Report (previous release)
U.S. November-24 CPI Inflation Report (previous release)
U.S. October-24 CPI Inflation Report (previous release)
U.S. September-24 CPI Inflation Report (previous release)
50 or 25 bps? The cut that could split the Fed (context post);
Post FOMC update: the Fed and the Market Shifts (context post);
Scenario Analysis as Communication Device for Central Banking (related post).
Review of the Inflation Release
The Consumer Price Index (CPI) rose by 2.8% (n.s.a.) year-on-year (YoY) in February (Chart 1), below the market consensus at 2.9% YoY and January’s figure of 3.0% YoY. On a month-on-month basis (MoM), CPI increased by 0.4% MoM (n.s.a.), compared to 0.7% MoM in January. On a seasonally adjusted basis, there was a significant moderation with a 0.2% MoM increase, lower than the 0.5% MoM recorded in January.
Core CPI (excluding food and energy) increased by 3.1% year-on-year in February (Chart 1), below market consensus at 3.2% YoY and January’s figure at 3.3% YoY. On a month-on-month basis, core CPI increased by 0.4% MoM (n.s.a.), in contrast to January’s 0.6% MoM increase. On a seasonally adjusted basis, the increase was at 0.2% MoM, moderating from the 0.4% MoM increase recorded in January.
Core services (services excluding energy) remain the primary driver of inflationary pressures. In February, core services increased by 4.1% YoY, compared to January’s 4.3% YoY increase, while core goods (goods excluding food and energy) remained in deflationary territory, experiencing another decrease of 0.1% YoY, the same rate as the one recorded in January. The current release confirms that core CPI inflation is stable above 3%, largely due to the very slow adjustment of core services.
The following chart (Chart 2) illustrates this contrast between core goods and core services common to many advanced countries (except for Japan):
The CPI in February was primarily driven by the housing component (Tables 1 and 2). The rent of shelter components rose by 4.3% YoY in February, slightly below the 4.4% YoY recorded in January. Noticeably, the shelter component increased by 0.4% on a month-on-month basis (n.s.a.) vs 0.5% MoM in January.
Within this context, supercore services (core services excluding shelter – Chart 3) increased by 3.8% year-on-year vs the 3.9% increase in January. On a monthly basis, the supercore component increased by 0.5% MoM in February, lower than January’s 0.8% MoM rise.
Summary
The beginning of the easing cycle since September 2024 has coincided with a slowdown in the disinflationary progress toward the 2% target.
The primary concern for monetary policymakers is the sluggish adjustment of core inflation, which has remained stable at just above 3% in the final months of 2024 and also in the first readings of 2025. Core services inflation continues to hover above 4%, largely driven by persistent housing costs.
Recent inflation data has further reinforced this outlook, showing that core inflation remains stuck above 3%. A key factor contributing to this persistence appears to be the asymmetric pace of adjustment between goods and services prices. While goods prices stabilize more quickly after a period of deflationary pressure, services prices adjust more slowly toward the 2% target. This divergence is likely playing a critical role in keeping core inflation elevated. In particular, the slow adjustment of the rent of shelter component is the main driver of overall inflationary pressure.
This current release further reinforces the cautious approach by the FOMC, postponing the rate cut later in the year.
Table 1: CPI by components (% YoY)
Source: Bureau of Labor Statistics (BLS).
Table 2: CPI by components (% MoM)
Source: Bureau of Labor Statistics (BLS)