Prices consumers pay for a wide range of goods and services rose in line with expectations in February, providing a final look at inflationary pressures before the Iran war-related oil shock rattled the outlook.
The consumer price index rose a seasonally adjusted 0.3% in the month, bringing the 12-month inflation rate to 2.4%, according to Bureau of Labor Statistics data released Wednesday. Both numbers were in line with Dow Jones consensus estimates.
Excluding volatile food and energy prices, core CPI was 0.2% month over month and 2.5% annualized, also in line with expectations, compared to expectations of 0.2% and 2.5%.
The annual rate was unchanged from January, showing that inflation is still above the Federal Reserve’s 2% target but not getting worse.
The report showed that inflation was generally stable, but prices in some product categories, such as used cars and car insurance, fell, while prices for housing and services rose slightly.
Shelter, the single largest component of the CPI, rose 0.2%, bringing the annualized rate to 3%. Within this category, rents increased by just 0.1%, the smallest monthly increase since January 2021.
Apparel prices, which are susceptible to tariff pressure, rose 1.3% on a monthly basis, the largest increase since September 2018. New car prices remained stable, rising just 0.5% year-on-year, while energy prices rose 0.6%, with an annualized increase of 0.5%.
Food prices rose 0.4% in the month and 3.1% from a year earlier. Egg prices fell by 3.8%, for an annual decline of 42.1%.
Markets had little reaction to the news, with stock market futures mixed and Treasury yields rising. While stocks fell in late trading, yields rose sharply, indicating traders were focused on the March CPI report and instead focused on rising oil prices, which could push headline inflation higher in the coming months.
“February’s CPI increase was in line with expectations, but this is the calm before the storm that will emerge from the gas price hike in March,” said Sonu Varghese, chief macro strategist at Carson Group. “Still, even putting energy shocks aside, this report shows the Fed has an inflation problem. The impact of tariffs is still hurting core goods inflation, while non-housing services inflation remains high.”
This data predates the recent spike in oil prices related to the war with Iran, meaning the impact of rising energy costs is likely to be felt in the coming months.
The US and Israeli attack on Iran has dramatically changed the outlook, at least in the short term.
After the attack, oil prices soared on concerns about supply disruptions in the Middle East.
Rising oil prices could complicate the outlook for inflation in coming months, as higher prices for gasoline and other energy products often spill over into transportation, shipping and a wide range of consumer goods. A sustained increase in oil prices can quickly translate into headline inflation, even if underlying price pressures remain stable.
But economists generally believe these developments are temporary and likely to subside once the situation in Iran calms down. Oil prices, which briefly topped $100 a barrel on Monday, were still well off those highs, but rose about 4% in Wednesday trading.
From the Fed’s perspective, February’s CPI report is likely to put the central bank on hold as it watches how current geopolitical tensions, on top of last year’s series of interest rate cuts, affect the economic outlook. Traders expect the next rate cut to occur in September, with about a 43% chance of a second rate cut before the end of the year, according to CME Group’s FedWatch tool.
Despite concerns that the tariffs would stimulate inflation and complicate matters for the Fed, the CPI report shows that the costs of products most affected by the tariffs have generally receded, while prices of key service components such as health care, airfare, and lodging have increased.
The Fed is scheduled to announce its next rate decision on March 18, and traders believe there is a nearly 100% chance the Fed will leave rates unchanged.
