The CPI report published on Wednesday indicated a slowdown in U.S. inflation. All components of the report were in the "red zone," falling short of the forecast values. While this is an important fundamental signal, it is somewhat outdated as it does not account for the effects of Trump's trade wars.
By the Numbers
According to the released data, the overall Consumer Price Index (CPI) in February decreased to 0.2%, compared to a forecast of 0.3%. The index had been on an upward trend for the previous three months (from November to January) but lost momentum in February. On an annual basis, the overall CPI had been increasing for four consecutive months (from October to January), reaching 3.0%—its highest level since January 2024. Analysts had anticipated it to slow to 2.9% in February, but the actual figure came in lower at 2.8%.
The core CPI, which excludes food and energy prices, showed a similar pattern. On a monthly basis, it fell to 0.2% in February (after rising to 0.4% in January and a forecasted drop to 0.3%). Annually, core CPI had risen to 3.3% in January but fell to 3.1% in February (forecast: 3.2%), marking its lowest level since May 2021.
The structure of the report shows that energy prices in the U.S. declined by 0.2% year-over-year in February after a significant increase of 1.0% in January. Gasoline prices dropped 3.1% (compared to a 0.2% decrease in the previous month). New car prices fell 0.3%, while used cars slightly appreciated by 0.8%. Growth in transportation service prices slowed from 8.0% to 6.0%, whereas food prices rose slightly from 2.5% to 2.6%.
What Does the Report Indicate?
Following the report's release, EUR/USD initially dropped several dozen pips to 1.0876. However, within hours, the pair returned to the 1.09 level and updated its intraday high.
What does the report suggest? Primarily, it indicates that U.S. inflation had already begun slowing before the new tariffs introduced by Donald Trump took effect in March. According to analysts surveyed by Reuters, the February inflation slowdown is likely temporary. Many expect price growth to accelerate in March and beyond due to the U.S.'s aggressive import tariff policies.
Although the Federal Reserve may officially recognize progress in addressing inflation, two important points must be considered: First, data from a single month does not establish a trend, indicating that it is premature to declare a consistent downward trajectory for inflation. Second, the effects of Trump's trade wars have yet to fully materialize. For instance, the University of Michigan's report on U.S. inflation expectations indicates that long-term inflation expectations have surged to their highest level in nearly 30 years. Surveyed Americans expect prices to rise by 3.5% annually over the next 5–10 years—the highest figure since 1995.
In other words, the "red flag" in the February CPI report has not reduced the risk of stagflation, as the White House only began implementing its tariff measures in March. The U.S. raised tariffs on Chinese goods to 20% and increased tariffs on Canadian and Mexican imports to 25% (though some of these tariffs were later revoked).
This explains the market's relatively muted reaction to the report. While significant, the report does not immediately impact market sentiment. If March's CPI data continues to decline, and key economic indicators (ISM Manufacturing Index, industrial production, retail sales, consumer confidence, and nonfarm payrolls) come out strong, stagflation risks will ease, and the dollar will strengthen. However, the greenback will remain under heavy pressure if inflation accelerates while economic growth slows.
EUR/USD Outlook
Despite the slowdown in the February CPI, the EUR/USD pair shows potential for further growth. Technical indicators support this outlook: on the daily chart, the price is positioned between the middle and upper Bollinger Bands and remains above all Ichimoku indicator lines, which have formed a bullish "Parade of Lines" signal.
The first target for upward movement is 1.0950, which aligns with the upper Bollinger Band on the daily timeframe and the upper boundary of the Kumo cloud on the weekly timeframe. A breakout above this resistance level would allow buyers to push towards the 1.10 level.
