Inflation stayed stubbornly elevated last month as gas prices rose in a snapshot of what consumer prices looked like before the U.S.-Israeli attack on Iran sent energy costs soaring.
Consumer prices rose 2.4% in February compared with a year earlier, the Labor Department said Wednesday, matching January’s 2.4% increase. Excluding the volatile food and energy categories, core prices climbed 2.5% from a year ago, also matching January’s level, which was the lowest in five years. Both figures are above the Federal Reserve's 2% target.
Wednesday’s data has been overtaken by the conflict that began when the U.S. and Israel attacked Iran on Feb. 28, which has caused wild gyrations in oil prices as shipping lanes through the Persian Gulf have suffered a rare shutdown. Gas prices have already jumped and are expected to push inflation much higher when inflation data for this month is released in early April.
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The price spike will challenge officials at the Federal Reserve and could slow consumer spending, which drives two thirds of the nation’s economic growth each year. The increase could be a one-time event and potentially reverse if the war ends soon, as President Donald Trump has hinted. But the spike in gas prices threatens to worsen inflation for at least a few months with Americans already worn down by nearly five years of stubbornly high prices. “Affordability” is already a thorny political issue for congressional Republicans who will face voters in midterm elections later this year.
On a monthly basis, prices rose 0.3% in February from the previous month, up from 0.2% in January. Increases at that pace for an extended period would push yearly inflation higher. Core prices moved up just 0.2%, down from a 0.3% rise in January.
Grocery prices rose more quickly, continuing a trend that has hammered family budgets. They rose 0.4% in February and were up 2.4% from a year earlier. Gas prices increased 0.8% last month, though were down 5.6% compared with a year ago.
Oil prices soared as high as nearly $120 a barrel late Sunday before falling closer to $87 by Wednesday after Trump suggested that the conflict would be a “short-term excursion.” Still, he has also threatened ongoing attacks and it isn’t clear when the conflict might end.
Some analysts warn prices will move much higher if the Strait of Hormuz remains closed, which has removed roughly three-quarters of the Persian Gulf region's oil production from world markets, according to Wood Mackenzie, an energy analytics firm. On Wednesday, a projectile hit a Thai cargo ship off the coast of Oman in the Strait of Hormuz, setting it ablaze.
Iran is also targeting oil fields and refineries in Gulf Arab nations, aiming at generating enough global economic pain to pressure the United States and Israel to end their strikes.
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Oil prices could soar to $150 a barrel in the coming weeks, the firm forecasts, if shipments don't resume.
That would push gas prices still higher in the United States, where they jumped to $3.58 a gallon on average nationwide Wednesday, according to AAA, an increase of about 20% just in one month.
Higher oil prices will lift other costs as well, including air fares and shipping costs, which could make groceries and restaurant meals more expensive.
At the same time, given the volatility of oil prices — U.S. crude prices rose 3% Wednesday after falling nearly 9% to $86.55 the day before — it is difficult to forecast how big the impact will be. If shipments resume in a week or so, gas prices will likely decline fairly soon, though they typically fall much more slowly than they rise.
Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, a consulting firm, expects inflation could jump by as much as 0.9% in March from the previous month, when that data arrives in early April. It would be the largest monthly gain in nearly four years. Yearly inflation could easily surpass 3% in that case and potentially near 4% in the following months.
The jump in gas prices so far this month has been the largest since March 2022, and before that since June 2009, Rosner-Warburton said.
“That is enormous,” she said. “Increases of that magnitude are highly unusual.”
Core prices will be much less affected this month, but could tick higher over time as more expensive gas pushes up airline fares and shipping, and other transportation costs. Core inflation is expected to have increased 0.3% in February from the previous month.
Even if the sharp rise is short-lived, it will almost certainly delay any interest-rate cut by the Federal Reserve, which meets next week. It cut its key rate three times last year before leaving it unchanged at its last meeting in January.
The Fed is already deeply divided over whether it needs to keep its rate at its current level of about 3.6% to push inflation down closer to its 2% goal, or whether it should reduce the rate to support borrowing, spending, and hiring.
Last Friday, the government reported an unexpectedly sharp job loss in February, as employers slashed 92,000 jobs and the unemployment rate ticked up to 4.4%, from 4.3%.
The weak jobs report puts the Fed in an especially difficult position: It would normally reduce rates to boost growth and hiring, but it typically raises rates — or at least keeps them where they are — if they are worried about inflation.
“That's always the worst-case scenario for the central bank,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago, on Bloomberg Friday. "As we get more uncertainties, I kind of think that the time at which it makes sense to act keeps getting pushed back.”
Gregory Daco, chief economist at EY-Parthenon, a consulting firm, said that normally the Fed would expect an oil price shock to have at most a temporary impact on inflation and might still cut rates if the economy needed lower borrowing costs.
But Fed policymakers were burnt just a few years ago when they initially said the post-COVID inflation spike in 2022-23 — the worst in four decades — would be temporary, Daco said. As a result, they will be reluctant to take the risk of prematurely lowering rates. A few officials even mentioned during the January meeting that they might have to hike rates soon, rather than cut them, according to the meeting's minutes — and that was before the Iran war.
“They do not want to be burned again,” Daco said.
