Once upon a time, inflation was the biggest concern for Wall Street. However, the Consumer Price Index (CPI) for February, released on Wednesday, was below expectations, and the market's reaction indicated that investors had already shifted their focus to the escalating trade war and its potential impact on inflation and economic growth.

According to the Zhitong Finance APP, the U.S. CPI for February increased by 0.2% month-on-month, marking the slowest growth in four months and falling short of the 0.3% forecast by economists. More importantly, this data ended a series of inflation readings that exceeded expectations since last November. In addition, the inflation rate over the past 12 months dropped from 3% to 2.8%, reversing a previous trend of rebound from last fall's low of 2.4%. Excluding food and energy prices, the core CPI increased by only 0.2% month-on-month, while the year-on-year growth rate fell from 3.3% to 3.1%, the lowest level since April 2021.

This mild inflation data should have been bullish news for the market. However, investors did not seem excited by it. Equity Index briefly rose after the data was released but quickly retreated to pre-announcement levels after the opening. The movement in the U.S. bond market was even more noteworthy, as the 10-Year Treasury Notes Yield fell briefly in the initial reaction before rebounding and climbing about 4 basis points to 4.32% by mid-day.

BMO Capital Markets interest rate strategist Ian Lyngen pointed out in a report that the U.S. bond market had almost no reaction to this 'mild' inflation data, with investors quickly shifting their focus to the re-inflation risks that the trade war might bring. 'This is the first instance in this cycle where the market has completely ignored low inflation data and focused on other risks.'

John Kerschner, Head of U.S. Securitized Products at Janus Henderson, believes the bond market's reaction may be more of an adjustment to the increase in bond prices over the past period. Since the end of February, U.S. 10-Year Treasury Notes Yield has dropped by about 20 basis points, suggesting that the market may be undergoing a correction.

Nevertheless, this inflation data still indicates that the Federal Reserve has made some progress toward achieving its 2% inflation target.

As a result, the stock market rebounded briefly after the opening. Prior to this, the S&P 500 Index had fallen nearly 10% since reaching an all-time high on February 19, approaching a technical correction range, while the Nasdaq Index had officially entered the adjustment zone.Technical AnalysisExperts believe that there is a certain rebound demand in the market in the short term. However, this rebound was unstable during morning trading, with the Dow Jones Industrial Average rising by as much as 288 points before retreating and turning negative, falling about 30 points at midday. The S&P 500 Index increased by 0.7% during volatile trading, while the rebound in Technology stocks boosted the Nasdaq Index by 1.5%. By the close, the three major indices were mixed, with the Dow down 0.2%, the Nasdaq up 1.22%, and the S&P 500 Index up 0.49%.

Since February, the market has been significantly volatile due to a series of trade war measures from President Trump. The Trump administration imposed high tariffs on major trading partners and repeatedly modified policies in a short period while threatening to impose more tariffs. Meanwhile, major global economies have also taken retaliatory measures, adding more uncertainty to future inflation data and exacerbating market concerns about economic slowdown.

Economists at Wells Fargo & Co noted in a report: "Higher tariffs may push up current inflation rates and inflation expectations in the coming months, but at the same time, they will pressure a labor market that has already shown slight signs of weakness."

Furthermore, even the inflation data from February itself revealed the underlying fragility of the economy. Kerschner from Janus Henderson pointed out that a 4% drop in airline ticket prices was one of the main factors for the CPI coming in below expectations. Previously, multiple airlines, including Delta Air Lines (DAL.US), had warned of a recent decline in airline travel demand and lowered their earnings expectations. "This is just a sign that consumer spending is losing momentum."

As the market grapples with the complex reactions to inflation and the trade war, investors will have to face a more challenging economic environment. Even if inflation cools in the short term, in the long run, the trade war may bring greater inflationary pressure and risks of economic downturn.