February Inflation Likely Eased — Core Cooled to 0.2% Right before the Iran War Sent Oil Spiking

With input from the New York Times, NBC News, the Wall Street Journal, AP, ABC News, Reuters, and CNBC.

Expect a tame-sounding inflation report Wednesday morning — but remember: it’s a snapshot of February, taken before the US and Israel launched strikes that sent oil prices into a frenzy. Still, economists think the Consumer Price Index will show inflation slowing a bit heading into the crisis, with core inflation — the measure the Fed watches closely that strips out food and energy — cooling to 0.2% month-over-month, down from 0.3% in January.

The basics to watch

• The Bureau of Labor Statistics will release the February CPI at 8:30 a.m. ET Wednesday.
• Wall Street and economists expect headline CPI up roughly 0.3% from January, keeping annual inflation near 2.4% year-over-year.
• Core CPI is forecast to have slowed to 0.2% month-over-month, a modest easing from January’s 0.3% pace.

So why the lift in markets if inflation was cooling? Mostly because February’s numbers don’t include the big oil shock that followed the late-month attacks. Those strikes — and the shutdown of the crucial Strait of Hormuz — pushed crude up sharply in the days after the report window closed, and gasoline prices jumped hard in early March.

A lot depends on how long the disruption lasts. If oil only spikes briefly, the hit to inflation may be short-lived and concentrated. As one economist put it, historically oil tends to flow into core inflation mainly through higher airfares. Diego Anzoategu at Morgan Stanley notes that the pass-through can be narrow and short unless energy stays elevated.

But other forecasters warn the damage could be bigger if oil stays high. Bank of America told clients that February’s report should show inflation “relatively contained,” while also flagging the evolving risk: a longer conflict would likely keep oil elevated and push both headline and core inflation higher in coming months.

And JPMorgan Chase’s team, speaking through chief US economist Michael Feroli, says the economy can probably weather a moderate oil surge — but sustained prices north of $100 a barrel would materially raise recession risk and produce a bigger drag on consumer spending.

Airfares and gas are the most visible channels. Airlines no longer hedge fuel like they used to, meaning higher jet fuel costs can translate faster into pricier tickets. Scott Kirby warned recently that fare increases could come “quick,” though demand hasn’t budged so far.

Meanwhile, pump prices have jumped — AAA reports US average gasoline prices have climbed noticeably compared with a month ago — and that feeds into household budgets fast. When transportation and shipping costs rise, groceries and restaurant bills usually follow.

February’s softer core figure would normally be the sort of data that nudges rate-cut talk back into view. But the oil shock complicates everything. The Federal Reserve faces the classic, horrible choice: cut rates to help a slowing job market and growth, or keep rates higher to prevent energy-driven inflation from becoming entrenched.

Federal Reserve officials are already skittish after being surprised by the post-COVID inflation surge a few years ago; several policymakers have said they’re wary of premature easing. A sharp and sustained jump in fuel costs could delay any rate cuts and might even force a pause in easing plans, depending on how inflation prints in March and April.

The jobs backdrop doesn’t help. The weak February payrolls print (a large negative swing in hiring) leaves the central bank with more reason to consider supporting growth — which fights against the case to lean into higher rates because of a fresh energy shock.

If the CPI shows the expected 0.2% core gain, that’s a decent sign that inflation was under control before the Iran-related supply hits. But markets and consumers are now dealing with the post-Feb reality: oil and gasoline swings that could make inflation jump in the months ahead, pressure household wallets, and complicate the Fed’s next moves.

In short — February looked manageable. March is the one that will tell us whether this is a short scare or the start of a longer upward drift in prices. Keep an eye on upcoming CPI prints and oil headlines — especially any news about reopening the Strait of Hormuz or fresh supply disruptions.