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US consumer prices rose by slightly less than expected in February, providing a moment of relief for investors and consumers concerned about the potential effects of President Donald Trump’s tariffs on the economy.

The figures could bolster the case for the Federal Reserve to cut interest rates next week, though the majority of traders are still betting on rates remaining steady.

The consumer price index, a measure of the costs of goods and services in the US, increased by a seasonally adjusted 0.2% last month, bringing the 12-month trailing rate to 2.8%, the Labor Department reported Wednesday.

Investors and economists have been watching the data closely since Trump took office for the second time. The stock market has been overall down since Inauguration Day amid escalating trade tensions and inflationary concerns, with the S&P 500 and Nasdaq Composite losing 7% and 10% of value since Trump was sworn in, respectively.

Those indexes ticked up 1% and 2% Wednesday morning, respectively, following the report.

SIGNALS

Tariff uncertainty, recession fears loom large

Sources: Bloomberg, Reuters

While the inflation report offered relief to markets following weeks of turmoil, some economists remain anxious about looking too closely at last month’s data given the rising uncertainty and escalating trade war that has only ramped up since. On Wednesday, new US tariffs on steel and aluminum imports went into effect, with Canada and the European Union quickly announcing their own retaliatory duties on Washington. Against that backdrop, the February data feels like “ old news ,” a Nationwide economist said: “There’s no disinflation momentum right now.” Another economist told Reuters that it remains unclear “where the real direction of inflation is at this time.”

Reasons for optimism despite recession fears

Sources: ING, Reuters, CNN, The New York Times

Some US companies are preemptively raising prices ahead of possible tariff impacts, suggesting that inflation will tick up in the coming months, ING experts said. Tariff uncertainty could also cause businesses to hold back on investment and hiring “until there is greater clarity – hence the growing talk of potential recession.” In the span of just 20 days , markets have transformed from booming trades to recession fears: J.P. Morgan’s chief economist on Wednesday upped chances of a market contraction to 40% . Still there are some reasons for optimism: Jobs numbers have been positive so far this year, and the economy overall remains strong, an economics professor wrote in The New York Times, noting that in 2022, similar recession fears gripped Wall Street — but the slowdown never arrived .

Consumers are stressed regardless

Sources: Axios, Bloomberg, The Wall Street Journal

Mounting evidence indicates US consumers are under severe stress. Americans’ willingness to spend has helped the US ward off the risk of recession in recent years, but they may finally be paring back. Three major US airlines warned this week of disappointing first-quarter results , blaming flagging consumer demand. Americans are missing monthly car-loan repayments at the highest rate in more than 30 years, and average inflation-adjusted household credit-card debt recently topped $10,000 for the first time since 2009 . Prior scares about US consumers had limited impact on the overall economy because debt or delinquency levels were concentrated among low-income Americans. That is now changing: “We’re seeing heightened credit stress among high-income consumers,” one analyst told The Wall Street Journal.