CPI Dips More than Expected, Markets Still Uneasy — Evening Brief – 03.12.25

The Consumer Price Index (CPI) increased by a modest 0.2% month-over-month in February, falling short of the 0.3% consensus estimate and January’s 0.5% rise, per U.S. Bureau of Labor Statistics data released Wednesday. This trimmed the year-over-year rate to 2.8%, down from 3.0% in January and below the 2.9% expected.

Core CPI, excluding food and energy, rose 0.2% month-over-month in February, below the 0.3% consensus and down from January’s 0.4% increase. This reduced the year-over-year rate to 3.1%, compared to 3.3% in January and better than the expected 3.2%.

The critical shelter index climbed 0.3% in February, matching the second-lowest monthly rise in the past two and a half years and driving nearly half of the headline CPI increase. This was tempered by a 4.0% drop in airline fares and a 1.0% decline in gasoline prices. Year-over-year, the shelter index slowed to 4.2%, its lowest in over three years.

The Owners’ Equivalent Rent (OER) index printed at 4.4% and actual rent reached 4.1% year-over-year in February, both marking three-year lows. This aligns with recent data showing new rent prices remaining flat year-over-year.

The outlook for lagging components like transportation services—chiefly motor vehicle insurance and repairs, which trail rises in vehicle and parts costs—improved slightly. In February, the index was flat month-over-month and up “only” 6.0% year-over-year, the smallest annual increase in three years.

Vehicle prices continued to normalize in February. New car prices remained flat month-over-month and dipped 0.3% year-over-year, while used car prices jumped 0.9% for the month but rose just 0.8% year-over-year.

While the report suggests that January’s inflation spike was a temporary hiccup rather than a sign of resurgent upward pressure, aligning with the Federal Reserve’s efforts to steer inflation toward its 2% target, some concerns remain.

RSM US chief economist Joseph Brusuelas warns of troubling trends beneath the surface of the latest data, pointing to persistent service-sector inflation that limits the Federal Reserve’s room to lower rates. “As we have recently noted, the combination of slower growth – we think GDP will arrive at 1.5% in the current quarter – and sticky inflation like that observed inside the service sector index creates the conditions for stagnation at best and stagflation at worst,” he wrote in a post on X.

Although the Federal Reserve may remain cautious before altering monetary policy, the Treasury market isn’t holding back, swiftly recalibrating to shifting economic outlooks that signal weaker growth—or potentially worse.

The U.S. 2-year Treasury yield, a key indicator of Federal Reserve policy expectations, is signaling increased odds of a rate cut. On Wednesday, it traded at 3.94%, near its lowest since October 2024 and significantly below the Fed’s current 4.25%-4.50% target range.

The 2-year Treasury yield’s decline marks a notable shift from earlier in 2025, when it hovered near the Fed funds target rate. The tight spread between the two in recent weeks had signaled bond market expectations of steady rates in the near term. Now, the latest drop to 3.94% on March 11, 2025, indicates investors are increasingly betting on an interest rate cut.

TradeStation global head of market strategy David Russell sees a June interest rate cut still on the table “because inflation continues to moderate, especially the key shelter category.”