U.S. CPI readings for February were cooler than expected, providing temporary relief in what has been a very difficult three weeks for risk assets. U.S. headline CPI was up +0.2% month-over-month and up +2.8% year-over-year versus consensus expectations for +0.3% and +2.9%, respectively. Core CPI also decelerated in the month, up +0.2% month-over-month and up +3.1% year-over-year while economists were expecting +0.3% and +3.2 %, respectively.

Shelter costs were once again the driver of this month’s prints for both headline and core CPI, as shelter rose +0.3% month-over-month and +4.2% year-over-year; this marks the smallest year-over-year increase for the measure since December 2021 and reflects the continued disinflation in new rental contracts that is finally starting to impact the overall measure. Food price inflation also decelerated in the month, primarily due to softening prices for food at home and despite a staggering +10.4% increase in egg prices. Overall, however, food at home is running at +1.9% year-over-year and coupled with a month-over-month decline of -1.0% in gas prices represents some relief for consumers from the incessant increase in prices over the past two years.

Outside of shelter, food, and energy, medical care rose by +0.3% month-over-month, used cars and trucks were up +0.9%, and airline fares were down -4.0%. It was encouraging that supercore services inflation was down broadly, from +0.8% in January to +0.2% in February, but it remains to be seen whether the decline in consumer demand prompting that relief will prove more worrisome; there is also likely to be little additional progress on goods prices in 2025. It also bears worth noting that the Fed is still very much focused on the PCE measure as its primary gauge, and that is estimated to come in at +0.3% month-over-month when it is released later this month.

While CPI prints in the midst of a Fed cutting cycle are always noteworthy, the confluence of events over the previous four weeks likely dampened the immediate market reaction. The mounting uncertainty resulting from rapid fire tariff announcements, evidence of a more concerned U.S. consumer, and the U.S. government teetering on the edge of a shutdown ahead of Senate approval of the latest funding bill has weighed on equity prices and boosted safe(r) havens such as gold and Treasuries. Positive offsets such as the announcement of a massive increase in fiscal spending in Germany and the potential resolution of the Russia-Ukraine war are managing to spark some optimism, but retaliation by the European Union in response to the Trump Administration’s 25% steel and aluminum tariffs could detract from that enthusiasm in the short-term. The net result is a clear concern about slowing growth and any indication that more meaningful monetary policy accommodation could help to dampen that decline would be more than welcome.

The challenge with placing too much emphasis on February’s report, however, is that the impact of tariffs is not yet fully reflected in the data. Using the first Trump Administration and the post-pandemic recovery for comparison, U.S. producers and retailers have been willing and able to pass on any input related cost increases to consumers. Absent a meaningful shock to demand as a result of consumer fatigue, they are likely to do so again this time. The situation for the Fed, therefore, is still very challenging as Fed Chair Jerome Powell and the other voting members of the FOMC weigh the potential for slower disinflationary progress and perhaps even a tick up in inflation should tariffs persist at current rates through the second quarter against what could prove to be a weakening employment situation should businesses become less constructive on growth prospects. With that said, expectations have moved from two interest rate cuts to three for 2025; the Fed will provide its new set of projections next week, which will likely reinforce the market move.

As for our outlook, our positioning entering 2025 centered on our overarching belief that the U.S. economy could grow above trend for this year. Expectations for Q1 2025 GDP have been lowered meaningfully due to a surge in imports and light consumer activity and the impulse we anticipate will manifest from business investment is likely a second half story. In addition, the Trump Administration including Treasury Secretary Scott Bessent is cautioning that in order to reduce the dependence of the U.S. economy on fiscal spending, there will likely be a period of uncomfortable transition. As a result, while many of the potential tailwinds remain in place, we are thoughtfully reviewing our expectations for both growth and inflation over the coming quarters, with the caveat that the scope and timing of tariffs creates a broader range of potential outcomes.

Against the backdrop of these concerns, however, we continue to see the potential long-term benefits of the move towards increased private sector spending and hiring. Balancing these risks, too, is the opportunity to invest at more reasonable valuations and in areas which we believe are more likely to benefit from this shift in policy. Our portfolio management teams are poised to take advantage of what we believe are short-term disruptions in credit and equities in the public markets; our views on a more persistent broadening of markets are only strengthened by the painful rotations experienced more recently. Private markets exposures can help to insulate investors from public market price gyrations, and, perhaps more importantly, allocating capital during inflection points such as this set the stage for potential long-term success. As such, we believe investors should remain committed to their long-term strategic allocations, reallocating as necessary to align with those thoughtfully created frameworks and focusing on reducing the idiosyncratic risk represented by large, concentrated positions and/or a lack of diversification across market cap, style and geography.