Consumer inflation in the U.S. eased to 2.8% in February 2025, offering some relief from the steady climb seen over the past six months. But with higher tariffs and immigration restrictions yet to make their mark, the Federal Reserve may be forced to rethink its rate cut trajectory. While the central bank has already slashed rates by 100 basis points in the last three policies of 2024, further reductions may be held up by inflation risks stemming from policy changes.

Food Costs Edge Higher, But Energy and Core Inflation Offer Relief

February’s inflation data delivered a mixed bag. While food inflation ticked up, core and energy inflation both eased, keeping the overall headline number under control.

Food inflation rose 2.6% year-over-year, with meat and eggs seeing notable price hikes.
Core inflation eased 20 basis points to 3.1%, largely driven by lower medical care costs and airline fares.
Energy inflation slipped into negative territory at -0.2%, thanks to a sharp drop in gasoline prices.

The easing in core and energy prices prevented a sharper spike in overall inflation. However, the impact of Trump’s tariffs on imported goods remains uncertain and could push prices higher in the coming months.

Month-on-Month Inflation Sees Broad-Based Moderation

Monthly inflation trends also showed a slowdown, with February’s headline inflation rising just 0.2% compared to the previous month.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Sep 2024	0.4%	-1.9%	0.3%	0.2%
Oct 2024	0.2%	0.0%	0.3%	0.2%
Nov 2024	0.4%	0.2%	0.3%	0.3%
Dec 2024	0.3%	2.6%	0.2%	0.4%
Jan 2025	0.4%	1.1%	0.3%	0.5%
Feb 2025	0.2%	0.2%	0.2%	0.2%

The drop in food inflation was driven by lower dairy prices, while gasoline price declines played a key role in energy’s pullback. The core inflation slowdown came from transportation services, particularly airline fares. These trends suggest a cooling inflation environment, though external risks remain.

Rate Cuts: Will the Fed Hold Back?

Despite the easing inflation numbers, the Federal Reserve may not be in a hurry to slash rates further. Inflation still sits 80 basis points above the Fed’s 2% target, and the full impact of tariffs hasn’t yet filtered through.

CME Fedwatch data shows markets are still pricing in significant rate cuts over the next two years, though the timing remains uncertain:

June 2025: 74.8% probability of at least a 25 bps rate cut.
December 2025: 85.3% probability of at least a 50 bps rate cut.
June 2026: 69.8% probability of at least a 75 bps rate cut.
December 2026: 65.5% probability of at least a 100 bps rate cut.

For now, traders see no chance of a rate cut at the Fed’s March 18 meeting. But as inflation trends develop, policymakers may face tough choices between containing price pressures and supporting economic growth.