Annual inflation held steady last month. But what comes next, now that the U.S. is fighting a war in Iran, is the question on everyone’s mind.
Consumer prices rose 2.4% in February from a year earlier, the Labor Department reported Wednesday. That compared with 2.4% in January, and was even with what economists surveyed by The Wall Street Journal had expected.
Core prices, which exclude volatile food and energy items, rose 2.5% from a year earlier, also in line with expectations.
Before the launch of the U.S.-Israeli war with Iran on Feb. 28, Wednesday’s inflation report would have been a key reading, shaping expectations for Federal Reserve policy in the months ahead. Now it is something more like a baseline—the reading against which economists will measure whatever the war does to prices in the months ahead.
“The February data is already completely inconsequential,” said Joseph Brusuelas, chief economist at RSM.
The Dow Jones Industrial Average was down in early trading. The S&P 500 was up.
The report is unlikely to alter the wait-and-see posture Fed officials have taken so far this year.
Core prices rose just 0.22% from a month earlier, a relatively tame reading that, in isolation, would remove an impediment to rate cuts if the job market deteriorates. But the asterisks that hang over the report—not just the war, but also a technical workaround that could be pushing the rate artificially lower—mean that the February reading doesn’t neatly point to where the economy is headed.
What’s more, Fed policymakers don’t focus primarily on the Labor Department’s inflation reading, but on a separate inflation metric from the Commerce Department called the personal-consumption expenditures price index, or PCE.
That metric has lately been running hotter than the Labor Department measure, and that wedge appears to have widened in February. That could temper enthusiasm at the Fed over Wednesday’s tame reading.
For all its caveats, Wednesday’s report provides a useful snapshot of where consumer prices were headed before the war started.
Prices for energy items rose 0.5% above their year-earlier level. Gasoline prices were down 5.6% from a year earlier, but prices for natural gas and electricity were higher. Electricity demand from data centers is pushing up prices in some parts of the U.S.
Food prices rose 3.1% from a year earlier. That was the largest gain since August.
Prices for goods excluding food, energy, and used cars and trucks were up 1.7% from a year earlier, marking the biggest gain since August 2023. That suggests that tariffs continue to exert some upward pressure on consumer prices.
Shelter costs—a large component of the Labor Department’s consumer-price measure—were up 3% from a year earlier, matching January’s gains. These have cooled substantially over the past couple of years as a result of smaller rent increases.
White House spokesman Kush Desai posted on social media that the U.S. economy was strong. “Once we are past temporary disruptions from Operation Epic Fury, we will see even greater economic progress with cooling inflation, higher real wages, and robust private sector growth thanks to President Trump,” he said.
Oil prices remain volatile, and the Strait of Hormuz is still effectively closed to commercial shipping, a constraint that hasn’t yet registered in consumer prices. Benchmark U.S. oil futures have swung sharply since the Iran conflict started and have traded at an average of about $82 a barrel so far this month, compared with a February average of about $65.
As a rule of thumb, each additional $10 increase in a barrel of oil adds about 0.2 percentage point to the Labor Department’s inflation reading, calculates Brusuelas. The backs of different economists’ envelopes can look a little different, but most are betting on oil prices boosting inflation in March.
Economists also believe that missing data on housing-cost increases in October—the result of last year’s government shutdown—are causing year-over-year inflation readings to be understated. That downward bias should disappear in the April inflation report, with measured inflation picking up as a result.
The war’s ultimate effect on inflation remains difficult to parse. Beyond crude oil prices, analysts are watching whether shipping disruptions ripple outward to raise costs for other commodities such as fertilizers, chemicals, and industrial inputs that depend on stable, affordable transport.
Gasoline and other energy items represent a fairly small portion of consumer spending—about 6%, by the Labor Department’s reckoning. But gasoline can have an outsized effect on views of inflation: Not only is it a frequent purchase, but its price graces big signs alongside the road. As of Monday, a gallon of regular gas averaged about $3.50, according to the Energy Information Administration. That compares with a February average of about $2.91.
There is also the question of how long oil prices will remain elevated. Markets are fixated on how high oil climbs, but for the broader economy, the more consequential question may be where prices settle over the course of the year. A sharp spike that quickly reverses can be absorbed, leaving little lasting effect on inflation readings and allowing the Fed to shift its focus back to the health of the labor market.
But high oil prices that linger would be harder to shake. That is because they would give supply chains time to lock in higher costs, squeezing corporate profit margins already pressured by tariffs, and leading some companies to consider raising prices for consumers. In that situation, the Fed could face a difficult trade-off between trying to bring inflation under control and protecting growth.
January figures for the Commerce Department’s PCE inflation gauge are slated for Friday. Economists expect these will show overall prices up 2.9% in January from a year earlier, and core prices up 3.1%. The Fed targets 2% inflation.
The details of Wednesday’s report indicate that the PCE will be elevated in February, too, according to economists.