Truflation BLS CPI Forecast and US Monthly Inflation Report - February 2026.

February 2026

Economic Overview

U.S. economic growth slowed more than expected at the end of 2025 as a government shutdown weighed on spending and investment. According to the Bureau of Economic Analysis (BEA), real gross domestic product (GDP) increased at an annualized rate of 1.4% in Q4 2025, significantly below the 2.5% consensus estimate. Consumer spending expanded at a slower pace during the quarter, while government spending declined sharply amid the longest shutdown on record. The shutdown alone is estimated to have reduced GDP growth by approximately one percentage point. For the full year, the U.S. economy grew 2.2% in 2025, down from 2.8% in 2024.

Although the shutdown contributed to weaker growth, the deceleration from the 4.4% annualized expansion in Q3 2025 was primarily driven by softer consumer spending and a decline in exports. Personal consumption expenditures rose 2.4% in Q4, down from 3.5% in the previous quarter. Meanwhile, exports fell 0.9% after surging 9.6% in Q3. Despite the slowdown, underlying demand remains resilient.

Exhibit 1 – Percentage Contribution to GDP Growth

Source: Bureau of Economic Analysis

The moderation in consumer spending is also evident in the latest Monthly Retail Sales data from the U.S. Census Bureau. Retail sales reached $735 billion in December 2025, essentially unchanged from the previous month but 2.4% higher than December 2024. While retail sales continued to grow on a nominal basis, the pace of growth slowed considerably throughout the year. Annualized growth declined from a peak of 5.1% in March to 2.4% in December, signaling a clear cooling in the second half of 2025. This trend raises questions about the resilience of the U.S. consumer heading into 2026.

At the same time, the personal savings rate has steadily declined, falling from roughly 5% at the beginning of the year to 3.6% in December 2025, its lowest level in more than three years. This suggests that consumers may be approaching the limits of their spending capacity, potentially contributing to weaker GDP growth in 2026. The decline also reinforces concerns around a K-shaped economy, where high-income households have been less affected by inflation than lower-income households. However, a lower savings rate can also reflect improved consumer confidence. Strong equity markets may be encouraging households to allocate savings toward investments rather than traditional savings accounts in search of higher returns.

Wage growth has also moderated. Annual wage growth has hovered around 4% year-over-year in recent months, down significantly from the ~5.5% growth recorded in mid-2023. The combination of slowing wage growth and declining savings rates may raise concerns about the sustainability of consumer spending as we look into 2026.

Exhibit 2 – Monthly Savings Rate & Truflation Annualized Wage Growth

Source: Bureau of Economic Analysis & Truflation Wage Tracker

The U.S. labor market shows signs of remaining stable, though conditions appear to be gradually slowing. The current environment is characterized by a “low-hire, low-fire” dynamic, where companies are reluctant to lay off workers but are also cautious about expanding headcount.

The Employment Situation Report from the U.S. Bureau of Labor Statistics highlighted volatility in recent months, with a surprise rebound in hiring in January followed by a sharp and unexpected contraction of 92,000 jobs in February, alongside a modest increase in the unemployment rate to 4.4%.

Other labor market indicators, such as ADP, Truflation, etc., suggest continued underlying stability. Initial jobless claims, currently around 213,000, remain close to the long-term historical average of 219,000, which is generally consistent with a healthy labor market. However, hiring activity has slowed noticeably. The ratio of job openings to unemployed workers has declined, and hiring timelines have lengthened, indicating a more cautious approach from employers.

It is clear that the labor market lacks dynamism. Much of the recent job growth has been concentrated in healthcare and education, rather than across a broader range of sectors. Reduced labor turnover can weigh on productivity, as talent is less likely to move toward roles where it can be most effectively utilized.

Recent commentary from Federal Reserve officials suggests growing confidence that the labor market remains stable, a view that aligns with Truflation’s assessment. Policymakers are increasingly focused on geopolitical risks, particularly the possibility that a longer conflict with Iran could push oil prices higher and reignite inflationary pressures. According to the latest CME FedWatch data, the majority now expect the next Federal Reserve rate cut to occur in July, with the probability of a second rate cut in 2026 having declined.

Overall, while GDP growth has cooled, the U.S. economy remains fundamentally strong. Solid consumer spending and continued investment driven by the AI boom have supported economic expansion. There are also near term factors that could boost activity, including tax refunds between February and April, which may support consumption and lift GDP in the first half of the year. The Atlanta Fed’s GDPNow model is currently forecasting 3% growth for Q1 2026, suggesting that economic momentum may strengthen in the months ahead.

Tariff Impact on U.S. Inflation

The latest International Trade Report from the U.S. Census Bureau shows a significant widening in the trade deficit in December. The deficit reached $70.3 billion, representing a 33% increase from the previous month. This deterioration was largely driven by a rise in goods imports, which continue to exceed the average levels observed throughout 2024.

At the country level, the trade deficit with China narrowed by a substantial $94 billion when comparing 2024 with 2025. However, this improvement has effectively been offset by rising deficits with other trading partners. Combined deficits with Vietnam, India, and Mexico increased by $93 billion, while the deficit with Taiwan surged by an additional $73 billion.

The recent Supreme Court decision striking down tariffs imposed under the International Emergency Economic Powers Act (IEEPA) introduces significant uncertainty. A federal judge in New York ruled that companies that paid tariffs struck down by the Supreme Court are due refunds. No doubt the government will appeal or seek a stay to buy more time for US Customs to comply. Estimates suggest potential refunds could range between $130 billion and $180 billion, although determining the exact figure is difficult because it is unclear what portion of tariff revenues originated specifically from IEEPA-related measures (such as fentanyl and reciprocal tariffs) versus earlier tariffs and sector-specific duties.

In response, the administration has implemented new tariffs under Section 122 of the Trade Act of 1974, introducing a 10% tariff on imports from all countries. While a 15% tariff had previously been threatened, it has not yet been implemented. Section 122 allows tariffs of up to 15% for a maximum period of 150 days, after which Congressional approval, specifically from the Senate, is required for continuation.

Several existing tariff policies remain unchanged:

• USMCA exemptions remain in place, meaning qualifying goods continue to face 0% tariffs.

• Sectoral tariffs, which apply regardless of country of origin, also remain unchanged:

  • 25% tariffs on all auto imports

  • 50% tariffs on imports of steel and aluminum

  • 50% tariffs on copper imports

The key takeaway is that the effective tariff rate is currently declining. Customs and excise duties paid by importers to the federal government have begun to fall despite a significant increase in import values in December. This trend is likely to persist in the coming months, though considerable uncertainty remains beyond that horizon.

Exhibit 3 – Monthly Gross Receipts & Effective tariff rate (Current month as % of previous month import value) 

Source: US Department of the Treasury

Exhibit 4 – Monthly Total Value of Imports

Source: US Department of the Treasury

What is clear from the data is that U.S. import volumes have accelerated and are expected to continue with the new set of tariff policy changes. Current import levels are now above the 2024 average, which prevailed prior to the implementation of Trump Tariffs 2.0. This suggests that importers are forced to replenish and may as well be front-loading purchases to take advantage of relatively lower tariffs before potential policy changes in the near future.

Further complicating the outlook is messaging from the current administration. Officials have suggested that businesses seeking favorable treatment should continue to honor previously agreed tariff structures. Additionally, President Donald Trump has indicated that countries aligning with BRICS economic policies could face an additional 10% tariff. Looking ahead, the administration may attempt to replicate the previous reciprocal and fentanyl-related tariffs using alternative legal authorities, including:

• Section 301 of the Trade Act of 1974, which authorizes tariffs in response to unfair or discriminatory foreign trade practices. Implementation requires an investigation by the U.S. Trade Representative, typically lasting 6–12 months, and there is no statutory maximum tariff rate.

• Section 232 of the Trade Expansion Act of 1962, which allows tariffs on imports deemed a threat to U.S. national security. Investigations are conducted by the Department of Commerce and must be completed within 270 days. This authority was previously used for steel and aluminum tariffs.

• Section 338 of the Tariff Act of 1930, which permits tariffs of up to 50% on imports from countries that “unreasonably discriminate” against U.S. commerce. This provision can be implemented relatively quickly and is widely viewed as a potential mechanism for reintroducing reciprocal-style tariffs.

• Section 201 of the Trade Act of 1974, which provides safeguard tariffs designed to protect domestic industries from sudden import surges causing serious injury. The U.S. International Trade Commission must conduct an investigation within 120 days, with a final report submitted within 180 days. Tariffs can reach up to 50% above existing tariff levels, though they generally apply to broad sectors.

Sections 301, 232, and 201 require formal investigations, meaning implementation could take several months. Section 338, by contrast, could be deployed more quickly, although heavy reliance on it may invite additional legal scrutiny.

The White House is therefore likely to continue introducing new tariff measures if existing ones expire or are overturned in court. Given the typical 9–18 month lag between filing a lawsuit and a final judicial decision, it is possible that tariff policies enacted during the current administration will remain in place for an extended period. Even if challenged, tariffs could persist until at least January 2029, creating ongoing volatility around court rulings, Senate approvals, and new policy announcements.

From a macroeconomic perspective, the easiest way to interpret these changes is as a short-term tax reduction for importers, which could temporarily support GDP growth but also widen the trade deficit. If combined with additional fiscal stimulus aimed at consumers, the result could be stronger near term economic growth alongside a further deterioration in fiscal balances.

This mix of stimulus and evolving tariff policy is likely to remain a key concern for the Federal Reserve, particularly given the risk that renewed tariff pressures could reignite inflation. As such, tariff developments will be an important factor to monitor as new economic data emerges in the coming weeks.

Special Topic: The New Fed Chair

The Federal Reserve reduced interest rates by 25 basis points in September, October, and December, before pausing in January. At present, the Fed appears to view risks to both sides of its dual mandate, inflation and employment, as more balanced. Policymakers have provided little guidance on how long the current pause may last, but the prevailing sentiment is that the Fed will remain on hold until labor market data signals the need for additional easing. This could occur as soon as the next employment report, though it may also take until later in the year. As repeatedly emphasized by Fed officials, policy decisions remain highly data dependent.

An additional source of uncertainty is the upcoming change in Federal Reserve leadership. Jerome Powell’s term as Chair ends on May 14, and President Donald Trump has nominated Kevin Warsh as his successor. 

Financial markets currently appear confident that Warsh will ultimately be confirmed by the Senate. However, the confirmation process may prove more complicated than widely assumed.

The first step in the process is approval by the Senate Banking Committee, which consists of 24 members: 13 Republicans and 11 Democrats. Among the Republican members is Senator Thom Tillis, who has indicated that he will not support any new Fed Chair nominee while the Department of Justice investigation involving Powell remains active. If all Democrats oppose Warsh, as many analysts currently expect, the committee vote could split 12–12, effectively stalling the nomination at an early stage. 

Senator Tillis is considered unlikely to change his position, particularly given that he has announced plans to retire at the end of the year. If that stance holds, the administration may eventually need to make concessions to move the nomination forward.

If Warsh were to clear the committee stage, the nomination would then move to the full Senate, which currently consists of 53 Republicans, 45 Democrats, and 2 Independents. If Democrats and Independents vote against the nomination, four Republican defections would be required to block confirmation. At present, both Senator Tillis and Senator Lisa Murkowski have indicated reluctance to support a new Fed Chair nominee while the Powell investigation remains unresolved. In that scenario, only two additional Republican defections would be needed for the nomination to fail.

The timeline for this process is uncertain. Historically, confirmation of a Fed Chair nominee from outside the Federal Reserve typically takes two to four months. Given the potential political hurdles in this case, the process could lean closer to the upper end of that range. If delays persist, the administration may face a tightening timeline if it intends to install a new chair immediately after Powell’s term ends.

If no nominee has been confirmed by May 15, Federal Reserve Vice Chair Philip Jefferson would serve as acting Fed Chair until the confirmation process is completed. 

Should Warsh ultimately be confirmed, he would occupy the seat currently held on an acting basis by Stephen Miran, who is serving as a temporary Federal Reserve governor and voting member. In that case, Miran would likely step down from that role.

Another possibility is that Warsh’s nomination becomes sufficiently delayed that President Trump withdraws the nomination and selects a different candidate. Given the limited time before May 14, the administration might choose an internal Federal Reserve candidate, who would typically face a faster confirmation timeline of one to three months.

Under this scenario, Christopher Waller could emerge as a potential nominee. If that were to occur, Miran’s seat would likely remain intact, and Miran himself could be nominated for a full 14-year term as a Federal Reserve governor.

Current market expectations suggest roughly a 70–75% probability that Warsh is eventually confirmed, with a 25–30% probability that his nomination either fails or is withdrawn. However, given the political dynamics involved, the outcome remains uncertain until the process is completed.

Warsh has historically been considered a hawkish policymaker. During his tenure as a Federal Reserve governor from 2006 to 2011, he advocated for tighter monetary policy and was notably concerned about inflation risks during the Global Financial Crisis. In subsequent years, he frequently criticized the Fed for maintaining excessively low interest rates and for allowing the central bank’s balance sheet to expand too aggressively. More recently, however, Warsh’s stance has shifted. Over the past year, he has advocated for lower interest rates while maintaining a hawkish view on the size of the Federal Reserve’s balance sheet.

In simple terms, Warsh appears to support lower policy rates combined with a smaller Fed balance sheet. That said, important details remain unclear. It is not yet known how far he would be willing to reduce rates, for example, whether he would support a policy rate as low as 1%, as President Trump has previously suggested or what level he considers appropriate for the Fed’s balance sheet.

An additional complication is that Warsh’s recent shift toward lower rates may not necessarily be permanent. There remains a low-probability but plausible scenario in which he could revert to a more hawkish stance after taking office and potentially even advocate for rate increases if inflation risks reemerge. At this stage, such an outcome appears unlikely, but not impossible, and could reasonably be assigned a probability of roughly 30%.

Inflation Update – Health Care, Education & Gas prices rising

While growth slowed in Q4, economic activity is expected to return to trend in Q1. With both economic growth and oil prices rising, inflationary pressures appear set to increase again.

The Truflation prediction for the BLS CPI in February incorporates the BLS's new expenditure weights released in January. These weights are based on the 2024 Consumer Expenditure Survey and will be applied for 2026. Using these updated weights, Truflation’s CPI prediction for February stands at 2.4% year on year, in line with market consensus. Current estimates fall within a narrow range of 2.3% to 2.6%. 

The primary drivers behind the renewed rise in inflation are health care, education, and most notably gasoline prices, reflecting inflationary pressure across both goods and services as well as the core index.

Crude oil prices have been on the rise since mid January and in February, the price of WTI crude oil increased from $63 at the start of the month to just over $71. Since then, and with the onset of the conflict with Iran, crude oil has posted its largest gains in futures trading as the escalating war has disrupted global fuel supplies. Over the past week alone, WTI crude oil futures surged 12.21% (or $9.89) to close at $90.90 per barrel on March 6, 2026. Meanwhile, Brent crude rallied 8.52% (or $7.28) to settle at $92.69 per barrel. Since the beginning of the month, these prices have risen 26% and 18% respectively, and this surge will likely continue to push gasoline prices higher through April.

President Donald Trump has recently demanded an unconditional surrender from Iran, raising the prospect of a prolonged conflict that could significantly disrupt global oil and gas markets. The war has already brought traffic through the Strait of Hormuz close to a standstill. Qatar’s Energy Minister, Saad al-Kaabi, has warned that crude oil prices could reach $150 per barrel in the coming weeks if oil tankers remain unable to pass through the strait.

Exporters across the Gulf region may declare force majeure if they have not already, as they are unlikely to accept liability for supply disruptions under current conditions. The Trump administration also announced a $20 billion insurance program for oil tankers operating in the Persian Gulf, though this has done little to calm crude markets. These developments could dampen economic growth in the coming months.

On the supply side, Iraq has shut down approximately 1.5 million barrels per day of production, while Kuwait has also begun cutting output due to Iranian threats to tanker passage. If the Strait of Hormuz remains closed to shipping, total production cuts could approach 6 million barrels per day by the end of the week, according to JP Morgan.

The impact on consumers is already visible. The average price of regular gasoline has risen 27 cents in the past week alone, highlighting how rapidly energy shocks are feeding into consumer inflation.

Exhibit 5 – WTI Crude Oil Futures Price; US$90.9 on March 6, 2026

Goods prices are rising on a month-on-month basis, driven primarily by a combination of supply chain bottlenecks, strong consumer demand, and rising production costs, including wages and energy. These pressures reflect both demand-pull and cost-push inflationary forces.

Additional contributing factors include heightened economic uncertainty and the risk of further price increases by manufacturers. The ISM Manufacturing PMI recorded its second consecutive month of expansion at 52.4, following 52.6 in January. Growth has been driven largely by new orders and production, as companies may be accelerating activity ahead of potential tariff changes. Input costs for aluminum, copper, steel, and labor have increased, while shortages persist in electrical and electronic components. Despite these constraints, firms expect overall revenues to increase by approximately 4.4%.

Exhibit 6 – Truflation Year on Year Key Inflationary Metrics: Goods vs Services vs Core.

Service prices have also increased month on month, largely due to persistently high labor costs, which are quickly passed through to consumers, particularly in health care and education. Unlike goods producers, service businesses cannot easily build inventories and therefore must adjust prices more immediately to offset rising operating costs.

According to the ISM Services PMI, the primary drivers of growth were increased business activity and new orders, signaling a robust rebound in the sector. Pricing indicators continue to reflect persistent inflationary pressures across many service industries, suggesting that cost inflation remains significant.

Exhibit 7 – Truflation Year on Year Category Inflation Drivers

In February, the largest upward contributors to inflation were health care, education, clothing, and gasoline, while food, communications, household durables, and housing exerted the greatest downward pressures. This composition reflects evolving consumer behavior alongside persistent supply-side adjustments, including tariff changes and rising global energy demand.

Sector-Specific Inflation Drivers

• Health Care: +1.9% MoM | +4.9% YoY. Health care prices and insurance premiums are rising rapidly due to elevated medical inflation, increasing labor costs for medical staff, and significant hospital consolidation that has reduced competition. Key drivers for 2026 include the expiration of enhanced federal Affordable Care Act subsidies, rising prescription drug prices, and greater utilization of high-cost medical treatments.

• Education: +1.7% MoM | +4.5% YoY. Education costs continue to rise, driven primarily by reduced state funding for public institutions, expanding administrative overhead, and increased investment in student amenities and technology. Additional pressure comes from strong demand for higher education and rising faculty compensation.

• Communications: −1.3% MoM | +2.7% YoY. Prices for internet and wireless services are declining, particularly in real (inflation-adjusted) terms, largely due to intense competition, technological advancement and the expansion of more efficient network infrastructure. Despite elevated inflation across many sectors, the communications industry continues to exhibit a deflationary trend, with consumers receiving faster speeds and more data for lower effective prices.

• Household Durables & Daily Use Items: −0.7% MoM | +4.9% YoY. This category is largely influenced by household and cleaning supplies, where prices have begun to ease due to heightened competition among major retailers, moderating inflation, and efforts to regain price-sensitive consumers. Large retailers such as Target, Walmart, and Kroger have implemented price reductions on thousands of everyday essentials to attract budget-conscious shoppers.

• Food: −0.4% MoM | −0.1% YoY. Food prices are beginning to cool, with declines in certain categories such as eggs, poultry, and beef. These reductions reflect easing supply chain constraints and lower agricultural commodity costs, including wheat and coffee. As supply conditions improve, retailers and producers have implemented targeted price reductions across select food items.

• Housing: −0.4% MoM | −1.2% YoY. This category presents a mixed picture, with owned and rental housing costs declining, while inflation on other lodging, such as hotels and short-term rentals, rising significantly.

  • Owner-occupied housing prices have softened due to several factors, including persistently high mortgage rates that have reduced buyer purchasing power, rising housing inventory in some markets that has given buyers more options, and a general pullback in demand amid broader economic uncertainty. While this does not represent a nationwide housing crash, a growing share of sellers have lowered asking prices in order to attract buyers and move properties, particularly in markets such as Denver, Phoenix, and Raleigh.

  • Rental prices are also declining as a record wave of new large-scale apartment supply enters the market. This surge in inventory has intensified competition among landlords. Combined with seasonally weaker demand during the winter months and higher vacancy rates, landlords are increasingly lowering rents or offering concessions, such as one or more rent-free months, to attract tenants.

  • By contrast, hotel prices are rising due to stronger seasonal demand, elevated operating costs driven by inflation, and higher labor expenses, especially in certain markets. Continued strong travel demand has also supported higher prices, with some resort destinations reportedly seeing price increases of as much as 33%.

Inflation Outlook: Short to Medium Term

Inflation was expected to remain relatively moderate in the near term. However, there are growing signs that it is likely to be more persistent and even accelerate. While some forecasts point to a gradual decline in early 2026, rising oil prices and escalating geopolitical tensions pose meaningful upside risks, potentially pushing inflation higher beginning in March and in the months that follow.

Key factors shaping inflation in the next couple of months are:

• Energy and Geopolitics: Ongoing conflict and potential supply disruptions in the Middle East have driven a sharp rise in oil prices. Higher crude prices are likely to feed through to gasoline and transportation costs, increasing headline inflation in the coming months.  The assumption is that this plays out over a few more weeks, and then see some de-escalation in April or May.

• Level of Tariffs: Currently 10% across the board, but President Trump has threatened that the rate could accelerate to 15%.  If this is the case, this would only be good for 150 days, and then the government would need to find ways to replicate previous tariffs.

• M2 growth: This has picked up faster than expected and could limit CPI declines in later quarters. This could happen if the Federal Reserve starts QE regardless of whether the economy needs it or not. Market perception is that Warsh is unlikely to do this and is more likely to do QT instead. 

• Government Policies: The inflationary implications of fiscal policy, including tax relief, expiration of enhanced federal Affordable Care Act subsidies, etc., could add further upward pressure on prices.

• Food and Goods: Although some goods prices may stabilize, certain food categories, including beef, pork, and processed foods, are projected to experience price increases in 2026 due to supply constraints and higher production costs.

• Labor Market Conditions: The labor market remains tight, with low unemployment and strong wage growth continuing to exert upward pressure on service sector inflation, particularly in labor-intensive industries.

• Economic Slowdown: If this gains traction more quickly than anticipated in the latter half of the year, this would likely make the Fed cut rates and initiate QE faster than anticipated, which might result in even lower CPI figures if met with lower M2 velocity from either or both the tariffs and economic slowdown.

As a result of these risks, particularly the ongoing conflict in the Middle East, it remains uncertain how much prices will rise in March and how inflation will evolve after the first quarter. Truflation expects headline CPI, as reported by the Bureau of Labor Statistics (BLS), to increase to approximately 2.6% year-on-year in March. However, the magnitude of this increase will depend largely on developments in energy markets. Inflation could rise more sharply if crude oil prices continue to climb, while a faster de-escalation of geopolitical tensions could result in a more moderate increase.

Looking beyond the first quarter, the inflation outlook will depend significantly on the duration of the conflict. Assuming gasoline prices remain elevated through April, inflation is likely to stay temporarily higher during that month. Thereafter, price pressures are expected to begin easing in the second half of Q2.

From that point forward, inflation is projected to gradually cool through Q3 and Q4, reaching approximately 2.1% by the end of the year. While this would represent continued progress in disinflation, it would still leave inflation slightly above the Federal Reserve’s 2% target for 2026.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on February 2026

TF 2026 - Inflation Report - US - M2 - Presentation.pptx

TF 2026 - Inflation Report - US - M2 - Presentation.pptx.pdf

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About Truflation

Truflation provides a set of independent inflation indexes drawing on tens of data partners/sources and millions of product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.94% accuracy in predicting inflation in the last 12 months.