Inflation gauge stays high ahead of Iran war impact

The inflation gauge February data shows price pressures remained elevated even before the Iran war drove energy costs higher, raising concerns about the path of inflation in the months ahead.

New figures from the US Commerce Department indicate that inflation stayed stubbornly above the Federal Reserve’s target.

Prices rise faster than expected

The Fed’s preferred inflation measure increased 0.4% in February from the previous month. On an annual basis, prices rose 2.8%, unchanged from January.

Core inflation, which excludes food and energy, also climbed 0.4% monthly and stood at 3% year over year.

At this pace, inflation would exceed the Fed’s 2% target if sustained throughout the year.

Inflation pressures build before energy shock

The inflation gauge February data suggests underlying price pressures were already strengthening before the conflict in Iran pushed gas prices higher.

Economists warn that inflation could accelerate further in March as energy costs feed into broader prices.

Forecasts point to a sharp monthly increase of 0.9% in March, with annual inflation potentially reaching 3.4%.

Fed faces growing policy challenge

Persistent inflation complicates decisions for the Federal Reserve, which must balance slowing price growth with maintaining economic stability.

Some Fed officials have already signaled openness to rate hikes if inflation does not ease.

At the same time, higher prices reduce the likelihood of near-term rate cuts, which markets had previously expected.

Consumer spending shows signs of strain

Rising costs are beginning to affect household finances.

Inflation-adjusted consumer spending barely increased in February, while incomes fell 0.1%—the first decline in several months.

Although spending rose 0.5% before adjusting for inflation, much of that gain was offset by higher prices.

Inflation remains the key risk

The inflation gauge February report sets the stage for upcoming data that will reflect the full impact of the Iran war.

While the economy may still grow around 2% in the first quarter, sustained inflation could weigh on consumers and delay monetary easing.

For policymakers, the challenge is becoming clearer: inflation is proving more persistent than expected, even before external shocks intensify the pressure.