The February consumer price index, released Wednesday at 8:30 a.m. ET, is expected to show prices rose only slightly, just before the Iran war caused energy costs to soar.
Analysts and economists surveyed expect overall inflation to rise 0.3% from January. On a year-on-year basis, inflation is expected to remain at 2.4%. Core inflation, which excludes volatile food and energy, is expected to slow to 0.2% month-on-month, down from 0.3% in January.
“February’s CPI report should continue to show that inflation remains relatively subdued,” Bank of America economists said in a recent note.
Importantly, the February report was produced before the United States and Israel launched a major offensive against Iran at the end of the month.
The vital Strait of Hormuz, off the southwest corner of Iran, has been effectively closed since the war began.
More than 20% of the world’s oil supply typically reaches international markets via waterways. As a result, US oil prices have increased by more than 20% since the first strike. Retail gasoline prices also rose by more than 50 cents.
Also in February, the Supreme Court ruled that President Donald Trump overstepped his presidential authority when he imposed emergency tariffs on a country-by-country basis last year, reversing many of the president’s tariffs. President Trump replaced some of the tariffs with a 10% tariff worldwide, but the impact on prices is not yet clear.
“Perhaps more important than February’s data is the evolving inflation risk space,” Bank of America said. “Our base case is for a short-term conflict, but if the conflict is prolonged, oil increases are likely to be more sustained.”
“This would put upward pressure on headline inflation, core inflation, and inflation expectations in the coming months,” BofA analysts added.
“While the economy should have little difficulty weathering the modest rise in oil prices, there is a growing risk that higher oil prices could become a more significant drag on the economy in the near term, especially if oil prices rise well above $100 per barrel and remain there,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note this week.
Still, he said, “there remains a risk of larger and more sustained increases in oil prices if supply disruptions continue.”
Iran continued its exchange of fire with neighboring countries on Tuesday.
Morgan Stanley economist Diego Anzoateg wrote in a recent note that the impact of higher oil prices on core inflation is “not only small, but very narrow. Historically, pass-through has occurred primarily through airfares. Absent a sharp increase in energy prices, the impact on core inflation tends to be short-lived and limited.”
U.S. oil prices rose above $100 a barrel on Sunday and Monday morning, but trading has slowed since then, with benchmarks trading around $85 a barrel late Tuesday.
Airlines used to hedge against price increases, but they no longer do so.
United Airlines CEO Scott Kirby told CNBC on Friday that fare increases “will probably start very soon.” Still, he said demand “hasn’t gone back one step” since the war began.
