On the surface, the inflation data for February released this week brings some encouraging news. But in reality, there are indications that the Federal Reserve may remain inactive on the issue of interest rates.

Although both CPI and PPI are lower than expected, this may not necessarily be reflected in the main indicators used by the Federal Reserve to measure inflation.

Several Wall Street economists have stated that due to some complex mathematics behind the overall data and trends in several key areas, policy makers are unlikely to be reassured by these data.

In a report, Stephen Juneau, an economist at Bank of America, said, "In short, inflation in 2025 is off to a bad start. Our forecast for PCE reinforces our view that inflation is unlikely to fall enough for the Federal Reserve to cut interest rates this year, especially considering that policy changes will push up inflation. We insist that policy rates will remain until the end of the year unless economic activity data really weakens

The market agrees with this, at least for now. According to calculations by CME Group, traders believe that the likelihood of a rate cut at next week's Federal Open Market Committee (FOMC) meeting is almost zero, and the likelihood of a rate cut in May is only about a quarter.

Although the Federal Reserve focuses on two indicators from the US Bureau of Labor Statistics, it believes that the Commerce Department's PCE is the final conclusion on inflation.

Central bank officials believe that PCE, especially the core PCE that does not include food and energy prices, can reflect price trends more broadly. This index also reflects more closely what consumers are buying, rather than just the prices of individual goods and services. For example, if consumers replace beef with chicken, PCE will better reflect this than CPI or PPI.

Most economists believe that the latest PCE data scheduled to be released later this month will show that the year-on-year inflation rate will remain stable at a maximum of 2.6%, and may even rise by one level, further away from the Federal Reserve's target level of 2%.

Krishna Guha, Global Policy and Central Bank Strategy Director at Evercore ISI, wrote that specifically, the PPI report released on Thursday "confirms our concerns that the mild inflation data in February will lead to hotter than expected inflation data for the Federal Reserve's preferred PCE indicator." PPI is a measure of wholesale costs and is therefore considered an indicator of channel inflation.

He added, "PCE will not steadily decline until the beginning of the second quarter. On the contrary, it looks like it will be fluctuating

Sam Tombs, Chief US Economist at Pantheon Macroeconomics, stated that some areas where PPI transmits and drives up PCE include rising hospital care prices, insurance prices, and air transportation prices.

Combs wrote, "The result is almost certain to make the Federal Reserve retreat

He predicts that the core PCE for February will show an inflation rate of 2.8%, an increase of 0.2 percentage points from January. Bank of America and Citigroup expect a core inflation rate of 2.7%, which is consistent with predictions from other Wall Street institutions. Anyway, it is heading in the wrong direction. The CPI shows that the core inflation rate is 3.1%, the lowest level since April 2021.