U.S. Analysis

Bottom line:

Does February’s benign CPI print even matter in the face of higher oil prices? The answer is yes, and the details are not encouraging for inflation’s path ahead. First and foremost, the core goods sector is being helped by used car prices – its recent price declines are offsetting upward pressure in other sectors facing tariffs, including auto parts, apparel, recreation goods, and personal care products. The divergence between core goods and core goods ex-used cars continued to grow on a y/y basis. We have flagged for several months now the pressures building in the pipeline for finished consumer goods, and this month should make clear the tariff passthrough to consumers is here. We continue to expect that pressure will build as core goods prices accelerate into Q2. And we see a limited path for disinflation in core services for the remainder of this year especially in shelter, where we see a floor for additional deceleration. On top of this, food prices continue to climb, a sector that is critical for consumer budgets. Layering on higher energy prices will add to the stress we are already seeing and risks weighing meaningfully on household spending if the situation in Iran is prolonged. The risk for second order impacts is also a concern particularly as transport margins are squeezed. Still, we continue to stress that the impacts will not be felt equally across the economy – lower and middle income households will feel the inflationary impacts more acutely. As we watch for signs of growing financial stress, the economic backdrop increasingly feels like it’s heading for a stagflationary lite scenario in 2026.

For now, we are focusing on separating the short-term from the long-term trends. Here is how we are thinking about this morning’s report in the context of longer-term themes:

1) Tariff passthrough is still top of mind and is the primary core inflation story

We continue to worry about tariff passthrough, with previous PPI prints signaling higher consumer prices are coming down the pipeline. The reality is wholesalers are charging retailers higher prices. Here is what we saw in those trade-exposed sectors:

• Excluding used car prices, there is a 0.7 percentage point differential from the year-over-year measure of core goods price growth – that gap has grown larger over the past seven months.

• Apparel prices spiked +1.3% m/m in February – this was the most pronounced price growth we have witnessed in the sector since 2021.

• Appliance prices +3.1% m/m – this was driven by “other” appliances which includes air conditioners, space heaters, and fans.

• New vehicles have yet to add to the index meaningfully even though motor vehicle parts and equipment are up +3.1% from a year-ago. This suggests that there is a lag between a spike in input prices being passed through to prices for finished products. The continued drawdown of significant pre-tariff inventories is likely the culprit of the delayed passthrough. The continued drawdown of significant pre-tariff inventories is likely the culprit of the delayed passthrough.

2) An oil spike will compound tariff shocks

Prices for energy commodities heated up in February, another sector weighing on consumer budgets. While the peak heating season is behind us, the combination of higher prices for electricity prices and air conditioners does not bode well for the consumer in the coming months. This month we saw several sizable increases in the following energy sectors:

• Fuel oil and other fuels were largely responsible (+7.7% m/m).

• Utility services also rose 3.1% m/m after unseasonably cold weather blanketed much of the US.

• Motor fuel ramped up meaningfully (+0.8%) and is set to keep climbing in the months ahead.

Layering on an oil shock could add between 0.3 and 0.7 percentage point to annual average headline inflation. We expect to see energy prices accelerate in the March print. The impact on headline CPI depends on the duration but should oil prices settle at $75/barrel or above by Q2, we expect this will nudge headline inflation up to 3.0% or higher by the second quarter.  We continue to expect that the Fed will be focused on core inflation and higher gasoline prices will be important for consumer perceptions of price growth.

3) Consumer budgets will be impacted by rising goods pricess

A squeeze on consumer budgets will likely shift demand as prices for food, gas and other consumer goods continue to rise.  We continue to see food prices heating up – this was foreshadowed by the Farmer Prices Paid index. Meat and dairy products have posted minimal price growth but prices for fruits and vegetables continue to climb. Higher costs for inputs such as fertilizers are contributing to the rise. Higher gas prices at the pump will force consumers to shift spending away from discretionary spending or dip into savings. But with lower and middle-income households already showing signs of stress (i.e., rising credit card and auto loan delinquencies), we think the savings option is limited.

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About the authors

Mike Reid is Head of U.S. Economics at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is a Senior US Economist  at RBC Capital Markets. Carrie is responsible for projecting key US indicators including GDP, employment, consumer spending and inflation for the US. She also contributes to commentary surrounding the US economic backdrop which she delivers to clients through publications, presentations, and the media. 

Imri Haggin is an Economist at RBC Capital Markets, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.

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