The US inflation rate dropped to a low of 2% in February. However, the reaction on the stock market was muted.
According to ING Group, there is still concern that companies’ price hikes due to tariffs could lead inflation rates during summer months.
Inflation data for February in the US was less than anticipated. Both headline and core prices were 0.2%, as opposed to 0.3%, which had been predicted by most analysts.
Core inflation fell to 3.1%, from 3.3%. The headline rate was 2.8%.
James Knightley said that the details were less rosy. The main reason for the lower inflation numbers was a 4% MoM decline in airline fares.
The threat of tariffs could re-energize the inflationary threat
Knightley stated that “pricing of long-term contracts must take into account potential increases in input costs right now”.
In the NFIB’s survey, released on Tuesday, the percentage of companies raising their prices increased by 10 points. The Fed Beige Book noted the same trend in its Beige Book last week.
Tariff uncertainty and rising prices could negatively impact the spending power of consumers.
According to ING, this could result in a weakening of consumer confidence and reduced spending.
Knightley, added
It could also be that a lack of clarity about the trade environment, and the possibility of tariffs reciprocating weigh on company sentiment. This may cause them to hold back their hiring and investment until they have more clarity.
But the economy continues to grow and create jobs. ING believes that the Fed will not cut rates until September due to increased inflation.
The housing market could see a dramatic drop in prices later this year
ING, however, said that it closely monitored new rents, since the Cleveland Federal Reserve Bank reported a rapid decrease.
As a result, the effect of tariffs could be greatly mitigated on inflation if CPI measures of housing cool down later in the calendar year.
We’ll explore the implications of this statement: Housing accounts for over 40% of core inflation.
Housing is a major component of the core inflation calculation. Any changes in the housing sector will have a significant impact on the inflation rate.
The housing market could be affected by a series of cascading effects if the economy shows signs of weakness.
An economy in decline often results in job loss, decreased consumer confidence and reduced spending.
This can result in a decrease in housing demand, and a corresponding decline in housing prices, or at the very least, a slower rate of increase in housing prices.
Fed’s path of monetary ease
Slowing down the increase in house prices would contribute directly to a lower rate of core inflation.
This could be a sign of economic weakening, which would lead the Federal Reserve to reduce interest rates faster than they had anticipated.
Borrowing becomes cheaper with lower interest rates, encouraging businesses to invest as well as consumers to spend.
Lower interest rates could make housing more affordable and boost demand, which would support housing prices.
According to ING, if signs of economic weakness are seen and the housing markets cool down, then the Fed may be forced to make more rate cuts, even as soon as this year’s end or early in 2026.
The post US inflation slows but tariffs threaten in the coming months: ING could be updated as new information unfolds.
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