What We Learned This Week

Cooler Inflation Provides Some Cushion: A softer-than-expected inflation report provided markets with some much-needed relief this week. The Consumer Price Index (CPI) rose 2.8% year-over-year, while core CPI (excluding food and energy) increased 3.1%—both coming in below expectations. Investors were particularly focused on this report as they assess the potential impact of the new administration’s aggressive trade policies. The effect of heightened tariffs on domestic economic growth remains uncertain, and markets are now trying to gauge whether these policies could create a meaningful drag on activity.

The concern is that if trade-related disruptions do slow the economy, the Federal Reserve would typically have room to step in with rate cuts or other supportive measures—but only if inflation remains under control. This softer inflation print eased some fears by suggesting that the Fed may still have flexibility to respond if needed. However, this is far from an all-clear signal. Tariffs themselves can contribute to inflationary pressures, and if price increases start to accelerate, the Fed could find itself in a tough position where lowering rates risks fueling further inflation. For now, uncertainty remains high, and until markets get a clearer picture of how trade and monetary policy will play out, volatility is likely to persist—with a potential downside bias.

Costco Sticks to its Long-Term Playbook: Costco joined the list of retailers delivering mixed results this quarter, with solid revenue growth offset by rising costs that pressured earnings. The company has long been known for its disciplined approach to pricing, often absorbing cost increases rather than immediately passing them on to consumers. That strategy is playing out again, with tighter grocery margins reflecting Costco’s willingness to take some near-term pain to maintain its strong customer loyalty. While this approach can weigh on short-term profitability, it has historically reinforced Costco’s reputation for value and helped drive long-term success.

On the demand side, Costco continues to stand out. Comparable store sales and customer traffic were both strong, outperforming many peers in a retail environment that has seen mixed consumer trends. The company also noted that it has yet to see any significant shifts in purchasing behavior, as its customer base remains focused on quality and value. Costco shares have pulled back more than 15% since early February, and while short-term moves are always hard to predict, it’s rare to see one of the most consistent and high-quality retailers trade at a discount.

Travel Demand Taking a Hit: Airline commentary this week fueled market jitters, adding to concerns about a more cautious and potentially weaker consumer. Delta delivered the first blow, slashing its full-year guidance due to softening domestic demand, which it attributed to declining consumer and corporate confidence amid rising macro uncertainty. Compounding the issue is growing passenger concern over safety following the January crash involving a regional jet and a military helicopter. While Delta’s CEO noted that current trends don’t indicate a recession, he acknowledged a pullback in leisure and business travel as a precautionary measure. American and United echoed similar sentiments, also highlighting weaker government-related travel as federal spending comes under increased scrutiny from the new administration.

The one outlier in stock performance was Southwest—not due to demand strength, but because of structural changes aimed at improving profitability. Under pressure from activist hedge fund Elliott Management, Southwest is making major shifts, including charging for checked bags for the first time and introducing a basic economy fare with fewer perks, aligning more closely with larger competitors. This follows its recent decision to move away from open seating in favor of assigned seating with premium upgrade options. While investors welcomed these margin-focused changes, the impact on Southwest’s loyal customer base remains to be seen. Overall, airline demand is showing some cracks, and whether this signals a broader economic slowdown or just heightened caution remains an open question.