February’s inflation print was encouraging for markets. However, tariff rhetoric has created uncertainty regarding inflation expectations. As such, 10-year Treasury yields continued higher after an initial pullback. U.S. equity markets were encouraged by the improvement.

Following four months of rising y/y headline inflation, the reduction from +3.0% y/y to +2.8% y/y was a welcome change in trajectory. Inflation cooled meaningfully on a m/m basis, coming in at 0.2% m/m (exp. +0.3% m/m) after increasing 0.5% m/m in January. Improvements in core services inflation helped reduce core CPI to 3.1% y/y (exp. +3.2% y/y), its lowest reading since April 2021.

There were a few key items that drove the sharp change from January’s 0.5% headline m/m rise to February’s 0.2% m/m increase. Core services had a meaningful pullback driven by public transportation, and particularly airlines. This area of deflation lines up with weaker earnings expectations from U.S. airlines. Given that travel spending typically tracks broader economic activity, this is an area to monitor to assess how the current economic uncertainty is impacting discretionary purchases. Given the pullback in pricing pressure for discretionary items, shelter accounted for almost half the m/m rise in headline inflation.