Inflation likely to spike in coming months after tame February reading

Inflation Expected to Rise Further as Middle East Conflict Drives Oil Prices Higher

Inflation likely remained elevated in February even before the recent spike in oil and gas prices, which is expected to further push consumer costs higher in the coming months.

Economists surveyed by FactSet forecast that consumer prices rose 2.5% in February compared to a year earlier, according to data set to be released Wednesday by the Labor Department. This represents a slight increase from January’s 2.4% rate. Core prices, which exclude volatile food and energy categories, are expected to have also risen 2.5% in February, matching January’s five-year low.

However, these figures will represent an already outdated snapshot of inflation, as they precede the outbreak of the Iran war on February 28. The conflict has caused significant disruptions to oil supplies, with shipping lanes through the Persian Gulf experiencing a rare shutdown. As a result, gas prices have already jumped considerably and are expected to drive inflation significantly higher when March figures are released next month.

The sudden price spike presents a challenge for the Federal Reserve’s inflation-fighting efforts and could potentially slow consumer spending while weighing on the broader economy. While the increase might prove temporary if the conflict ends quickly, as President Donald Trump has hinted, rising gas prices threaten to worsen inflation for at least several months. This comes at a time when Americans are already frustrated by nearly five years of stubbornly high prices, making “affordability” a contentious political issue for congressional Republicans facing midterm elections later this year.

Oil markets have shown extreme volatility, with prices soaring to nearly $120 per barrel late Sunday before falling back Monday after Trump suggested the conflict would be a “short-term excursion.” However, with ongoing threats of continued attacks, the timeline for resolution remains unclear.

Some analysts warn that prices could climb much higher if the Strait of Hormuz remains closed. According to energy analytics firm Wood Mackenzie, the shutdown has removed roughly three-quarters of the Persian Gulf region’s oil production from world markets. The firm forecasts that oil prices could reach $150 per barrel in the coming weeks if shipments don’t resume.

In the United States, gas prices have already jumped to an average of $3.54 per gallon nationwide as of Tuesday, according to AAA—an increase of approximately 20% in just one month. These higher gas prices will eventually impact other costs as well, including airfares and shipping, which could make groceries and restaurant meals more expensive.

The impact remains difficult to forecast due to the volatility of oil markets, with U.S. crude prices falling nearly 9% to $86.55 Tuesday afternoon. If shipping lanes reopen within a week or so, gas prices will likely decline, though typically at a slower pace than they rise.

Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, predicts inflation could jump by as much as 0.8% or 0.9% in March from the previous month—the largest monthly gain in nearly four years. This could push yearly inflation easily above 3% and potentially near 4% in subsequent months.

By comparison, overall prices are projected to have increased just 0.3% in February from January. The gas price increase so far this month has been the largest since March 2022, and before that, June 2009. “That is enormous,” Rosner-Warburton noted. “Increases of that magnitude are highly unusual.”

Core prices will likely be less affected immediately but could tick higher over time as more expensive gas pushes up transportation costs. February’s core inflation is expected to have increased 0.3% from the previous month.

Even if the sharp rise proves temporary, it will almost certainly delay any interest rate cut by the Federal Reserve, which meets next week. The Fed cut its key rate three times last year before leaving it unchanged at its January meeting.

The central bank already faces division over whether to maintain its current rate of about 3.6% to push inflation closer to its 2% target or reduce it to support economic activity. Last Friday’s unexpectedly weak jobs report, showing employers cut 92,000 jobs as unemployment ticked up to 4.4%, further complicates the Fed’s position.

“That’s always the worst-case scenario for the central bank,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago. “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, noted that while the Fed would normally view an oil price shock as temporary, policymakers remain cautious after incorrectly characterizing the post-COVID inflation spike of 2022-23 as transitory. Some officials even mentioned potential rate hikes during January’s meeting, before the Iran war began.

“They do not want to be burned again,” Daco concluded.