Inflation fell last month in a welcome sign for the U.S. economy that has been giving investors and consumers jitters as trade wars threaten to increase prices.

Wednesday’s inflation report was better than forecast by most economists but is still above the Federal Reserve’s 2% target. Inflation has made significant progress from the high of 9% during 2022 but has been stubbornly above 2% despite a prolonged period of elevated interest rates.

Inflation was also lower than expected on a month-to-month basis. Prices increased 0.2% in February from January, a welcome drop from a jump of 0.5%. Core prices also rose 0.2% in an improvement from 0.4% in January.

Prices increased 2.8% in February compared to a year ago, an improvement from January’s reading of 3%, according to the Labor Department’s consumer price index. Core prices that exclude volatile food and energy categories and are more indicative of where prices are headed rose 3.1% from last year, the lowest level since April of 2021.

Grocery prices, the most visible to consumers, were mostly unchanged from last month overall but had some continued spikes for staples like eggs. The price of eggs increased another 10.4% in February in the continuation of a trend caused by an avian flu outbreak that has raised prices nearly 60% since last year.

Housing costs, one of the prime drivers of elevated inflation because of a pandemic-era boom that sent sales prices soaring, showed significant improvement in February. Housing-related costs had their smallest 12-month gain since December 2021 with a 4.2% increase.

Data included in the report mostly predates the administration’s tariff rollout, which means their effects on prices might not have been fully captured. Tariffs on China have doubled since an initial tax on Chinese products in February, a 25% steel and aluminum tariff went into effect on Wednesday and an additional 25% levy on Mexican and Canadian goods is on delay until next month, when the administration’s “reciprocal” tariffs are also scheduled to go into effect on April 2.

“For the first time in five months, inflation moved lower in February. This confirms that despite the idiosyncratic price bumpiness, economic fundamentals were and remain disinflationary. Looking ahead, however, tariffs, confusion around trade policy and tighter immigration policy mean the risks to inflation are titled to the upside,” said Gregory Daco, chief economist at EY.

Slowing inflation brought some good news to Wall Street. It has been on a two-week slide because of tariff threats and a string of poor economic news that had increased recession odds from some economists and financial institutions. The three major U.S. indexes — the Dow Jones Industrial Average, S&P 600 and Nasdaq — closed on Tuesday at lower levels than where they were on Election Day when Trump won a second term.

The massive sell-off has been driven nearly entirely on tariff fears and uncertainties facing the economy. Investors and businesses have repeatedly been hit by back-and-forth rollouts of tariffs that make it difficult for companies to make plans for the future to keep costs down.

Inflation fears have also escalated among consumers in recent surveys. Expectations for higher prices can lead to workers demanding higher pay to combat them, forcing businesses to raise prices and creating a self-fulfilling spiral.

Along with increasing prices, economists have been concerned the tariffs and resulting trade war could slow growth after the economy climbed at a robust 2.8% pace in 2024.

February’s slower inflation is unlikely to change the Fed’s outlook on interest rates ahead of next week’s meeting, where officials are expected to continue to hold the benchmark interest rate — currently at a range of 4.25% to 4.5% — steady. Chair Jerome Powell and other voting members of the Federal Open Markets Committee have said recently they are waiting for more data to show progress on inflation and the potential impact of tariffs before changing rates.

“If the prevailing policy uncertainty worsens and market volatility rises further, this could lead to a vicious feedback cycle onto the economy and prompt some policymakers to consider easing monetary policy more. However, we suspect many Fed officials will favor retaining a restrictive stance to prevent inflation reignition — especially if inflation expectations rise further,” Daco said.

Despite the jitters in the market and a run of bad economic data, Powell has expressed optimism in the underlying strength of the U.S. economy and said the Fed is in a good position to adjust.

“If the economy remains strong but inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly,” Powell said in a speech last week. “Our current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”

What tariffs ultimately go into effect and what impact they have on the economy are the major unknowns facing the Fed.

Have a news tip? Contact Austin Denean at atdenean@sbgtv.com or at x.com/austindenean.