Prices paid by consumers for a wide range of goods and services rose in line with expectations for February, providing a final glimpse of inflationary pressures before an oil shock linked to the war in Iran upends the outlook.
THE consumer price index rose a seasonally adjusted 0.3% for the month, bringing the 12-month inflation rate to 2.4%, according to Bureau of Labor Statistics data released Wednesday. Both numbers match the Dow Jones consensus forecast.
Excluding volatility in food and energy prices, the core CPI showed a monthly rate of 0.2% and an annual rate of 2.5%, compared to forecasts of 0.2% and 2.5%, also in line with estimates.
Annual rates were unchanged from January, indicating that inflation remains above the Federal Reserve’s 2% target, but not getting worse.
While the report showed generally stable inflation, prices for housing and services rose slightly, while several categories of goods, including used vehicles and auto insurance, saw declines.
Housing, the largest component of the CPI, posted an increase of 0.2%, bringing the annual rate to 3%. Within this category, rents increased by only 0.1%, the lowest monthly increase since January 2021.
Clothing prices, which are sensitive to tariff pressures, saw a monthly increase of 1.3%, the largest increase since September 2018. New vehicle prices remained stable and increased by only 0.5% compared to last year, while energy increased by 0.6% and also saw an annual increase of 0.5%.
Food prices accelerated by 0.4% over the month and increased by 3.1% compared to last year. Egg prices fell 3.8%, bringing the annual decline to 42.1%.
Markets reacted little to the report, with stock futures mixed and Treasury yields rising. Stocks fell later in the session while yields rose, a sign that traders were reviewing the March CPI report and instead focusing on a rise in oil prices that could push headline inflation higher in coming months.
“CPI inflation for February was in line with expectations, but this is the calm before the storm that will emerge due to higher gas prices in March,” said Sonu Varghese, chief macroeconomic strategist at the Carson Group. “Nevertheless, this report shows that the Fed has an inflation problem even if we put aside the energy shock. The impacts of tariffs continue to hit inflation in basic goods, while inflation in non-housing services remains strong.”
The data predates the recent rise in oil prices linked to the war with Iran, meaning any impact from rising energy costs will likely be felt in the coming months.
The US-Israeli attack on Iran has radically changed the outlook, at least in the short term.
Following the assault, the price of crude oil rose sharply due to fears of supply disruptions in the Middle East.
Rising oil prices could complicate the inflation outlook in coming months, as rising prices for gasoline and other energy products often spill over into transportation, shipping and a wide range of consumer goods. Sustained increases in crude prices can quickly show up in headline inflation figures, even if underlying price pressures remain stable.
However, economists generally view these measures as temporary and likely to ease once the situation in Iran calms down. Crude prices are well off their peaks after briefly surpassing $100 a barrel on Monday, but rose about 4% on Wednesday.
From the Federal Reserve’s perspective, the February CPI report likely keeps the central bank on hold as it watches the impact of a series of interest rate cuts last year, as well as current geopolitical tensions, on the economic outlook. Traders expect the next rate cut to take place in September and estimate there is about a 43% chance a second cut will be made before the end of the year, according to CME Group’s FedWatch tool.
Despite concerns that the tariffs would spur inflation and complicate matters for the Fed, the CPI report showed a general decline in the costs of goods most affected by the tariffs, and an increase in prices of key services such as medical care, airline tickets and lodging.
The Fed will release its next interest rate decision on March 18, with traders assigning a near 100% probability that the central bank will remain unchanged.
