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- US inflation held steady in February at 2.4% annually, matching forecasts across all key measures.
- Since then, the outlook has shifted as the Middle East conflict temporarily pushed oil above $100 a barrel, threatening higher inflation in the months ahead.
- Despite concerns over Trump’s sweeping tariffs, goods prices largely declined in February, with apparel being a notable exception after jumping 1.3%.
- Businesses have so far absorbed much of the import costs, but economists warn this cannot continue for long, and a 10% global tariff now in place could soon push prices higher.
Consumer prices in the United States held steady in February, broadly matching expectations and offering what may be the last clear snapshot of inflation before the outlook shifted.
Soon after the data was collected, oil prices surged as tensions in the Middle East intensified, raising fresh concerns about energy-driven price pressures in the months ahead.
As a result, some economists already see the latest CPI report as backward-looking and outdated, capturing a period of relative calm before a potentially more inflationary environment took shape. Let’s understand exactly what happened.
February Numbers Come in as Expected
Headline CPI came in at 0.3% MoM, while the yearly basis came in at 2.4%, with both matching analysts’ forecasts. Core CPI also came in line with what was expected, 0.2% MoM and 2.5% YoY. ⁽¹⁾
These numbers were unchanged from January, meaning inflation was holding above the Federal Reserve’s 2% target, but not getting worse. Markets showed little reaction, with US stocks trading mixed while Treasury yields were slightly higher.
What Went Up, and What Came Down
As we break down the report, shelter costs rose 0.2% MoM and 3% YoY. Rent specifically posted its smallest monthly gain since January 2021, rising just 0.1%. Food prices climbed 0.4% in February and were up 3.1% YoY. Egg prices, however, fell 3.8% MoM and are now down more than 42% compared to last year. ⁽²⁾
Apparel saw the biggest jump among major categories, rising 1.3%, the largest monthly increase since 2018. Energy prices edged up 0.6%, while new vehicle prices were essentially flat. Used car prices and auto insurance both declined. ⁽³⁾
The Middle East Conflict Changes Everything
February’s CPI report was collected just before the Middle East conflict began, which completely flipped the global economic outlook. Following the escalations, crude oil prices surged above $100 per barrel as fears of supply disruptions across the Middle East become apparent.
However, oil prices pulled back after President Trump mentioned two days ago that the conflict could end soon. However, that comment didn’t matter much to oil traders, as tankers continue being hit in the Strait of Hormuz, sending prices soaring once again. Meanwhile, the International Energy Agency’s release of 400 million oil barrels has also failed to stabilize prices.
Economists warn that higher energy costs will likely show up in March and April inflation readings, as rising gasoline prices filter through transportation, shipping, and a wide range of consumer goods. Most economists view the energy spike as temporary, expecting prices to ease once the situation in the Middle East stabilizes. ⁽⁴⁾
A Report Made Obsolete?
The Middle East conflict began on February 28, the final day of the month that the data covers. Because of that, financial markets largely brushed off the February inflation data, seeing it as a snapshot of a pre-war economy.
While CPI match forecasts, investors quickly shifted focus to what rising oil prices mean for the road ahead. Markets are now trying to work out how energy price volatility will shape the Fed’s next moves.
The Fed Stays on Hold
For the Federal Reserve, the report does little to change its current approach. The central bank is widely expected to keep the Fed Funds rate unchanged at its March 18 meeting. Markets are not anticipating the first rate cut until September, with roughly a 43% probability of a second cut before the end of the year. ⁽⁵⁾
Policymakers are navigating a delicate balancing act, weighing the need to keep inflation under control against signs of a gradually softening labor market. At the same time, tariffs, potential tariff refunds, higher energy prices, and weakening employment are adding further uncertainty to the policy outlook.
Officials are also watching how last year’s rate cuts, alongside geopolitical tensions and trade pressures, continue to filter through the broader economy.
Tariffs Are Still in the Picture
President Trump’s sweeping tariffs have been a source of concern for inflation watchers. While a federal court struck down the emergency law he used to impose them, Trump responded by announcing a 10% global tariff, which he said could rise to 15%. Businesses have so far absorbed much of the cost, but economists say that cannot continue indefinitely.
Despite those concerns, February’s CPI data showed goods that were previously affected by tariffs saw price declines, while services like medical care, airline fares, and lodging pushed higher.
Still, analysts caution that the soft readings in core goods may not fully reflect what’s happening beneath the surface, particularly given strong services price data in the latest Producer Price Index report. ⁽⁶⁾
What Comes Next
Traders now will shift their focus on upcoming data, with the Fed’s preferred inflation gauge, the core PCE index, to be released on Friday and is expected to show a pickup in inflation.
With oil prices elevated, tariffs still in play, and geopolitical uncertainty running high, March and April data will be an important watch for signs that the brief period of calm is giving way to a new round of price pressures.
