Inflation remained subdued in February, despite a tight labor market, wage growth and tariff pressures.
The consumer price index increased .2 percent from January, the Bureau of Labor Statistics said on Tuesday, and was in line with economists’ expectations. That made for a 1.5 percent increase over last year. The three largest components—food, transportation and housing—all saw increases in February, with motor fuel prices at 1.5 percent pushing up transportation costs. Core inflation, which volatile excludes food and energy prices, rose .1 percent, lower than economists expected, and was up 2.1 percent year-over-year.
While unemployment remains low and wage growth has accelerated, economists are not seeing major signs that those pressures are being reflected in consumer prices at this point. And while U.S.-China tariffs continue to cause uncertainty for some businesses, economists said consumers will see them passed on gradually, not as a significant force on inflation.
“The underlying trend here suggests that inflation’s really not taking off,” said Scott Brown, chief economist at financial service firm Raymond James financial. “We have had some pipeline pressures due to higher tariffs, higher wages especially.”
Firms largely worked to avoid paying higher wages in a tight labor market, and avoid raising prices, by offering non-wage compensation such as signing bonuses for new workers, more paid vacation time or other perks, Brown said.
Last year, the Trump administration imposed a 10 percent tariff on Chinese imports, affecting goods such as electronics, industrial parts and vehicles, and held off on a 25 percent tariff. Corporate tax cuts may have helped some firms absorb some of the impact of high tariffs, Brown said.
Still, smaller businesses had to raise prices to adjust.
When the 10 percent tariff hit Johnson’s Restaurant Equipment in Neptune, New Jersey in December, it initially absorbed the hike, owner Joseph Marchese said. But after a few months, the company had to raise prices for items like frying pans to respond to the tariff — and made sure to explain to customers why it had to, he said.
“When you’re a small, family-owned company, you have to do that kind of stuff,” Marchese said. “Prices gotta go up, we all understand that, but the part that’s upsetting is we don’t know where the money’s going. The manufacturers couldn’t tell you.”
Tiffany Williams, who owns The Luggage Shop of Lubbock, Texas, said it’s uncertainty surrounding the future of tariffs that’s unsettling. With approximately 84 percent of her businesses’ goods—including backpacks, briefcases and travel accessories—on the tariff list, she had to respond with price increases, passing on raises from her luggage vendors.
“It’s just the not knowing what’s going to change and how consumers are going to respond,” she said. “We’re so thankful that things didn’t escalate to the 25 percent because that certainly would have been detrimental.”
In an otherwise subdued report, economists said they were surprised by the core CPI, which came in lower than expected, partly due to a drop in medical care prices. Even so, core inflation remains under control and weaker than expected, economists said.
“I think it’s a below-trend month with a few numbers that were unusually soft,” said David Sloan, a senior economist at Continuum Economics.
Meanwhile, the core rate continues to support the Federal Reserve’s position to be patient in raising borrowing costs for the foreseeable future, economists said.
“Inflation doesn’t look like it’s going to be a problem any time soon for the Fed,” said Ryan Sweet, a senior economist at Moody’s Analytics.