The latest U.S. Consumer Price Index (CPI) report is expected to present a mixed picture of inflation, with rising food costs likely counterbalanced by lower energy prices. Meanwhile, trade uncertainty continues to weigh on economic forecasts, and Federal Reserve Chairman Jerome Powell remains cautious about altering interest rates.

Inflation Trends: A Mixed Bag

Economic forecasts suggest a slight easing in inflation, with headline CPI expected to have risen by 2.9% in February on an annual basis, down from 3.0% in the previous month. Core inflation, which excludes volatile food and energy prices, is projected to dip to 3.2% from 3.3% year-over-year. On a monthly basis, headline inflation is expected to slow to 0.3% from 0.5%, with core inflation registering 0.4%.

Brett Ryan of Deutsche Bank highlighted the continued significance of rental prices within the CPI basket, noting that February 2023 witnessed strong gains in primary rents following a spike in owners’ equivalent rent (OER) in January. However, with no such spike this year, economists expect steady but moderate increases in both primary rents and OER.

Additionally, falling energy prices are anticipated to provide some relief, partially offsetting the impact of persistently high food costs.

Trade Uncertainty Compounds Economic Jitters

Market volatility has been exacerbated by shifting trade policies, with the Biden administration announcing and then reconsidering import duties on key trading partners, including Canada, Mexico, and China. The proposed tariffs—ranging from 25% to 50%—have sparked concerns that they could contribute to inflationary pressures, potentially reversing recent progress.

Deutsche Bank’s inflation expectations index, which tracks inflation sentiment, has risen to 2.18%, its highest level since late 2023. Excluding the post-pandemic period, this is the highest reading since 2008, indicating growing market concerns about price stability.

Federal Reserve Takes a Cautious Approach

Despite inflation risks, the Federal Reserve remains in no rush to alter monetary policy. Speaking at an event last week, Fed Chairman Jerome Powell reiterated the need for patience, emphasizing that rate cuts will only come when inflation is firmly under control.

Barclays analysts suggest the Fed faces a complex balancing act. On one hand, inflationary pressures—such as tariffs and labor market constraints—could necessitate further tightening. On the other hand, slowing economic activity might argue for rate cuts. A key question for policymakers will be whether to view tariff-driven price increases as transitory or as a longer-term inflationary risk requiring action.

Labor Market Resilience and Future Risks

The latest employment report was largely seen as strong, with job losses remaining minimal. However, looming federal workforce reductions could pose risks. According to Barclays’ Jonathan Millar, up to 500,000 federal jobs could be eliminated over the next two years as part of ongoing efficiency initiatives.

Other indicators of labor market softening, such as rising underemployment and slowing payroll income growth, could put a May rate cut back on the table—if these trends gain momentum.

With inflation trends still uncertain and trade policy in flux, the Federal Reserve is likely to remain cautious in the near term. As markets digest the upcoming CPI report, investors and policymakers alike will be watching closely for signals on whether inflation is truly moderating—or if new risks, such as trade tensions, will disrupt the outlook.