Tonight, will the CPI confirm "American stagflation"?

According to the Zhitong Finance APP, the U.S. Bureau of Labor Statistics will release the February CPI report on Wednesday. Economists predict that inflation in the U.S. may remain high in February, following a significant rise in January, further proving that progress in curbing prices has stalled. After a 0.5% increase at the beginning of the year, the CPI is expected to rise by 0.3% month-on-month in February. According to the survey, the core CPI, excluding the more volatile food and energy categories, is also expected to increase by 0.3% month-on-month. Year-on-year, the CPI is expected to grow by 2.9%, while the core CPI is expected to grow by 3.2%, both 0.1% lower than in January.

Concerns about Stagflation and Recession

The good news is that these numbers represent a continuation of the steady but relatively slow decline in inflation rates over the past year. The bad news is that both indicators remain well above the Federal Reserve's 2% target, which may lead the Fed to keep interest rates unchanged at next week's meeting. Persistent U.S. inflation may be driven by rising prices of goods, including food, further intensifying concerns about the U.S. economy falling into stagflation—where inflation remains high while economic growth slows.

Morgan Stanley economist Diego Anzoategui stated in a report, "We expect inflation to generally decelerate, with core goods and services weakening. So why is it still high? There are three reasons: (1) We expect used car prices to rise due to past wildfires; (2) According to our analysis, certain goods and services showed residual seasonal factors in February; (3) We believe supply constraints will push up airfare prices in February."

Meanwhile, Trump's tariff measures have raised market concerns about rising inflation and slowing economic growth. Given that Federal Reserve officials have historically focused more on the inflation aspect of their dual mandate of price stability and full employment, if prices remain high for an extended period, the Fed may remain cautious for a longer time.

However, Fed Chair Jerome Powell and his colleagues have indicated that, in their view, tariffs have historically been one-time price increases rather than fundamental inflation drivers. If this is the case again, policymakers may overlook any price fluctuations caused by trade policies and continue to cut rates, as the market has predicted this year.

Goldman Sachs economists expect the Fed to remain on hold until policies become clearer, and then possibly cut the benchmark lending rate by 50 basis points later this year. The company stated in a report: "We expect the rebalancing of the automotive, housing rental, and labor markets to further suppress inflation, although we anticipate that the catch-up inflation in the healthcare sector will offset some of the decline, and the escalation of tariff policies will boost inflation."

Options linked to short-term Fed rates—the Secured Overnight Financing Rate (SOFR)—suggest an increasing likelihood of multiple rate cuts by the Fed in the coming months. By the close on Monday, the market had already priced in expectations that the Fed would cut rates by about 80 basis points by the end of the yearLast week, the market expected a rate cut of only 60 basis points, but it is still anticipated that the first rate cut of the year will not come until June.

Moreover, against the backdrop of Trump's chaotic tariffs and federal government layoffs potentially further suppressing economic growth, traders increasingly believe that the risk of the U.S. economy falling into stagnation is growing. A report from Goldman Sachs pointed out that recession fears top the list of the "avalanche" in U.S. stocks; Goldman Sachs economists raised the probability of an economic recession in the next 12 months from 15% to 20%.

Economists at JP Morgan also raised the risk of a U.S. economic recession this year from 30% at the beginning of 2025 to 40%. Additionally, there were reports that Morgan Stanley economists downgraded their U.S. economic growth expectations last week and raised their inflation expectations. The bank predicts that the U.S. GDP growth rate will be only 1.5% in 2025 and will drop to 1.2% in 2026.

Barclays Private Bank's Chief Market Strategist Julien Lafargue stated, “It feels like this could be a lose-lose situation. Data that comes in above expectations could exacerbate the narrative of stagflation, while data that comes in below expectations could heighten concerns about a recession.”

Food Prices

Grocery prices have surged in recent months, primarily due to the spread of avian influenza in the U.S., with egg prices hitting an all-time high. Earlier this year, prices for other essential goods, including meat, fruits, and sugar, also rose at a strong pace. Some economists expect Wednesday's report will maintain this trend.

Morgan Stanley economists, led by Diego Anzoategui, wrote last week, “Egg prices continued to rise in February, and wholesale food prices continued to increase at a faster pace.” They added that they expect grocery inflation to remain above pre-pandemic trend levels at least throughout the summer.

Service Costs

A service cost indicator closely monitored by the Federal Reserve is expected to show some relief after recording its largest increase in a year in January. The so-called "super core services" indicator—excluding housing and energy—has shown a slowdown due to declines in airfare and medical costs.

Bloomberg economist Anna Wong stated that February's data will reflect the divergence between weak service demand in areas like hotels and travel and rising goods prices. She wrote in a report, “While service prices are softening—reflecting weakened consumer demand for non-essential items—this is a step in the right direction, but the goods sector's anti-inflationary trend had already stagnated even before Trump's tariffs were imposed.” Economists will also closely monitor housing costs, which remain one of the most stubborn categories in the CPI. Citigroup economists Veronica Clark and Andrew Hollenhorst expect housing prices to rise 0.27% month-on-month, a slowdown compared to January.

Many economists point out that businesses often raise prices and fees in the first quarter, which could boost the CPI index; however, the likelihood of businesses raising prices and fees in January is higher than later in the first quarter.

Early Impact of Tariffs

Some economists expect the February report to show early signs of tariff impacts, particularly from the additional tariffs on Chinese imports. Bank of America economists Stephen Juneau and Jeseo Park wrote on March 7: "One driver of our firm inflation forecast is the 10% tariff imposed on Chinese imports in early February. China accounts for a significant share of imports of furniture, clothing, and electronics in the U.S. If the tariffs have no impact this month, it simply means the effects will be delayed to the coming months."