Why Cooler Inflation Isn't Lifting Markets

February's inflation data provided conflicting stories. Both the CPI and PPI came in cooler than expected, but neither cheered the stock and bond markets. That's because the components of both gauges that feed into the Fed's preferred PCED inflation rate were actually a bit hotter. In addition, January's PPI increase was revised up from 0.4% to 0.6%. So it's unlikely that the Fed will lower the federal funds rate (FFR) anytime soon even if economic growth slows.

It won't be until March, or perhaps even sometime during Q2, that Trump's tariffs start to boost the inflation data. But in the meantime, goods inflation did decelerate in February. The final demand goods PPI fell back below 2.0% y/y to 1.7% y/y despite egg prices soaring 54%, which accounted for two-thirds of the 0.3% m/m increase (chart).