The February CPI report showed annual inflation cooling to 2.8%, versus expectations of 3.1%. Core inflation also slowed, driven by lower energy prices and moderating shelter costs. Analysts say this marks one of the clearest signs yet that the Fed's tightening cycle is delivering its intended effect.

Following the report, futures markets priced in a 78% chance of two rate cuts by year-end — up from 55% last week. Economists say if upcoming data continues to show cooling inflation, the Fed may shift toward a more accommodative stance earlier than planned.

Market Analysis: Inflation Data and Rate Expectations

Inflation Breakdown and Economic Implications

CPI Report Details

The February CPI report showed meaningful declines across several key categories. Energy prices fell 1.8% month-over-month, while food inflation moderated to 2.5% annually. Shelter costs, which had been stubbornly high, finally showed signs of cooling with a 0.3% monthly increase compared to 0.5% in January.

Services Sector Inflation

The services sector inflation, which had been particularly resistant to the Fed's tightening, showed its first meaningful decline. Services excluding energy fell to 3.9% annually from 4.2% in January, suggesting that wage pressures and service costs are finally responding to higher interest rates.

Economic Outlook

"We're seeing the kind of broad-based disinflation that suggests the Fed's policy is working effectively," said Jane Miller, Chief Economist at Morgan Stanley. "The question now is how quickly the Fed will respond to these encouraging signs."