New inflation data out Wednesday showed the annual pace of price increases was essentially unchanged last month, but it doesn’t reflect the surge in oil prices tied to the U.S. and Israeli campaign against Iran.
The conflict in the Middle East is threatening to rekindle inflation just as it had appeared to be cooling, with gasoline prices and airline tickets climbing and businesses across the economy bracing for higher transportation costs.
The consumer price index showed inflation rising at a 2.4 annual pace, the same as in January, although economists say that snapshot may already be outdated, because of the war-driven oil prices surge.
Separately, residual distortions in the data from the October government shutdown are also expected to continue to weigh on the index for the next several months, making inflation appear somewhat cooler than underlying pressures.
“This is perhaps the most unimportant CPI in years,” said Joe Brusuelas, chief economist at RSM, referring to Wednesday’s consumer price index for February. He estimates that rising oil costs alone could add roughly 0.5 to 0.6 percentage points to the annual inflation rate in next month’s data release.
“That means investors and policymakers can and should effectively discount the February reading,” Brusuelas added.
The price for Brent crude, the global oil benchmark, had at one point spiked to nearly $120 a barrel Monday morning, a level that could translate into gas prices surpassing a national average of $4 per gallon. Prices later retreated to just over $90 per barrel Tuesday morning — still significantly higher than before the strikes on Iran at the end of February. Higher oil prices feed quickly into gasoline costs and can ripple through other sectors — lifting the price of airline tickets, shipping and a wide variety of consumer goods that depend on transportation.
Rising energy and transportation costs are likely to intensify pressure on the Trump administration, which has made tackling high prices and affordability a central political goal. Policymakers face scrutiny from both voters and lawmakers as consumer costs climb, with rising prices threatening to undercut messaging that the economy is stabilizing.
While price pressures have cooled markedly since their 2022 peak, inflation has remained stubbornly elevated for five consecutive years and is still running near 3 percent — about a percentage point above the Federal Reserve’s preferred target.
The sharp rise in oil prices is also complicating the Fed’s work. Supply shocks such as a jump in energy prices tend to put the central bank in a bind because they push inflation higher while also slowing economic activity, forces that point policymakers in opposite directions.
Economists say the challenge is compounded by longer-term inflation expectations, which have so far remained anchored. But Vincent Reinhart, chief economist at BNY Investments, warned that rapid energy-cost increases could unsettle those expectations, making the central bank’s task of balancing price stability with economic growth even more delicate.
“From the Fed’s vantage point, their nightmare isn’t over,” he said.
The inflation report arrives at a delicate moment for the Fed, which has been trying to guide inflation back to its 2 percent goal without tipping the economy into recession. The central bank cut interest rates three times late last year before pausing in January. Officials are expected to pause again at their policy meeting next week, and investors don’t anticipate they will cut again until September.
Central bank officials rely more heavily on a separate gauge known as the personal consumption expenditures index, which is due later this week and is expected by many economists to show somewhat firmer price pressures than the CPI data. Even before the latest rise in oil prices, forecasters had expected the Fed’s preferred measure to run closer to 3 percent than to the central bank’s target.
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