The bureau noted that the February CPI figure marked the smallest 12-month increase since September 2021.
Excluding the volatile food and energy sectors, the core CPI rose by an annualized 5.5% in February — the smallest such 12-month increase since December 2021.
The Federal Reserve will likely closely examine the February CPI report as it prepares for its next monetary policy meeting on March 21-22.
The Fed's key short-term interest rate is now in a range of between 4.5% to 4.75%, after the central bank raised rates by 25 basis points at its February meeting.
As of Tuesday morning, according to CME Group's FedWatch tool, shortly after release of the CPI data, market participants' pricing of fed fund futures indicated there is a 79% probability that the Fed will increase rates by 25 basis points at the next meeting, and a 21% probability it will keep rates unchanged.
Crit Thomas, Cincinnati-based global market strategist of Touchstone Investments, commented by email that the CPI data is "just one input to the Fed's decision, but in isolation I believe it would support a 25 (basis point) increase."
However, he added that if "regional banking pressures persist or escalate, then I think the Fed will pause." Hiking rates, he noted, "amidst financial sector fragility would not be a good look, and any tightening of financial conditions is already amplifying the Fed's tighter policy stance."
Settling down regional banking concerns has to be the Fed's priority right now, he added.
Touchstone has $23.1 billion in assets under management.
"The Fed still has work to do, and their actions and communications are going to come under increasing scrutiny given the events of the past few days," said Andrew Patterson, Malvern, Pa.-based senior international economist at Vanguard, by email. "They need to be careful in balancing the risks of price and financial stability."
Vanguard has $7.5 trillion in AUM.
Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund, based in Greenwich, Conn., said by email that the CPI data "continues to show elevated inflation, which is counter to the narrative that the Fed had essentially won the inflation battle.
"We are in a situation where inflation is still high and the economy is at risk for further weakening, particularly amid the recent bank failures. This combination is consistent with stagflation."
The Fed, she noted, "has to face the fact that its rate hikes have not only failed to control inflation, but they have started to cause instability in the banking system."
The Fed is now a very difficult spot, Ms. Davis said. "They need higher rates to fight inflation, but higher rates could continue to spark problems in the banking sector," she said. "The Federal Reserve is running out of good choices."
Quadratic has about $1.1 billion in assets under management.
Johan Grahn, Minneapolis-based head ETF market strategist at AllianzIM, said by email that recent bank failures and questions about what might come next have made the Fed's job a bit more precarious. "They now find themselves between a rock and a hard place where a pause in rate hikes would send a signal of heightened contagion concern from the Fed, while continued with rate hikes may perpetuate the contagion risk itself," he said.
AllianzIM has $19.5 billion in AUM.