US consumer inflation is stable before the Iran conflict increases oil prices

U.S. consumer price rose modestly in February, as rents continued to increase at a steady pace. However, households had to pay more for gas and groceries. And higher costs will be in store due to the escalating Middle East war.

The Labor Department's Consumer Price Index Report on Wednesday also showed that inflation was muted in the month prior to the U.S.-Israeli strikes against Iran. Tehran retaliated against the attacks that took place at the end of February and has subsequently pushed up oil prices.

AAA data showed that gasoline prices had risen by 20% since the start of the war, to $3.58 a gallon. Gasoline prices had been increasing in anticipation of hostilities in Middle East.

The Federal Reserve is expected to hold interest rates at the same level next week, according to economists.

Ellen Zentner is the chief economist at Morgan Stanley Wealth Management. She said that a steady inflation rate would be welcome on any day. But, with geopolitical unrest and soaring oil prices, this data may not have the same weight, either in the markets or among the Fed.

Bureau of Labor Statistics of the Labor Department reported that Consumer Price Index increased 0.3% in February after increasing 0.2% in January. CPI increased by 2.4% in the 12-month period ending February. This is the same as the increase of January, and reflects the removal of high readings from last year. The CPI increase was in line with expectations.

In order to achieve its inflation target of 2%, the U.S. Central Bank tracks Personal Consumption Spending price indexes.

After a similar increase in January, the rise in CPI was reflected in a 0.2% rise in owners' equivalent rental of primary residence. The primary rents rose by 0.1%. This is the lowest gain since January 20,21. Economists argued, however, that the October inflation data was not collected due to last year's shutdown of government, which caused rents to be distorted.

In normal times, this would not be a problem, said Gregory Daco, chief economics at EY-Parthenon. "These are not normal times. The data should be interpreted in light of the distortions caused by the government shutdown, the unprecedented volatility in trade policy, and the record swings in oil prices linked to the Middle East conflict."

Daco estimates that the 43-day record shutdown last year caused CPI inflation to understate by approximately 0.3-0.4 percent points. After two consecutive months of declining gasoline prices, the price increased by 0.8%. The price of oil soared to well over $100 per barrel in the first part of this week before falling back. On Wednesday, oil prices recovered as traders questioned whether the International Energy Agency proposal to release record amounts of reserves would be able to offset any potential supply shocks caused by the Iran War.

Economists expected gasoline prices to reach $4 per gallon in the near future. Electricity prices, though they eased monthly, jumped by 4.8% compared to a year earlier due to the strong demand for artificial intelligence from data centers. Last month, prices for household gas soared by 3.1%. Prices for gas piped to households rose 10.9% on an annual basis.

Last month, food prices increased by 0.4%. This was largely due to a 3.7% increase in the price of chewing gum and candy. Fruit and vegetable costs increased by 1.4% while non-alcoholic beverages went up 0.8%. Prices for dairy products and other related items dropped by 0.6%, while cereals and baked goods fell by 0.2%. Prices of food are 3.1% more expensive than they were a year earlier.

RISE IN FOOD AND GASOLINE PRICE IS IMPACTING CONSUMERS

The Trump administration highlighted the moderate increases in CPI as an indication of a cooling of overall inflation. A White House spokesperson posted on social media that "the nation will see even greater economic progress" once the disruptions caused by war are over.

The rising food and gasoline prices pose a risk to Trump's Republican Party as they prepare for the November midterm elections.

The Wall Street stock market was mixed. Dollar rose against a basket currency. The yields on U.S. Treasury bonds were higher. The CPI increased as well, despite the staggered, but continued pass-through of Trump's sweeping Tariffs. Trump imposed them under a law intended for national emergencies, that has since been ruled unconstitutional by the U.S. Supreme Court.

The Institute for Supply Management's surveys show that input costs have been steadily rising. Trump responded to the Supreme Court ruling by imposing an initial 10% global tariff. He said that this would increase to 15%.

The CPI rose 0.3% in January, but gained only 0.2% when the volatile energy and food components are excluded. Core CPI inflation was slowed by the third consecutive monthly decrease in motor vehicle prices as well as a smaller increase in rental rates.

The cost of furniture and household operations increased by 0.3%, while apparel prices rose 1.3%. This is due to the import duty pass-through.

Healthcare costs rose 0.5%. Hospital services increased by 0.6%, while prices for physician's services rose 0.3%. ?Prescription prices, however, fell 0.2%. Hotel and motel room prices rose by 1.1%. The cost of airline tickets increased by 1.4%, and it is possible that they will rise even more as jet fuel prices are likely to increase due to the war.

The core CPI rose 2.5% in the 12 months to February after increasing by the same margin of 2.5% in January. This also reflects favorable base effects. The tame core CPI readings are unlikely to translate into modest core PCE inflation gains for February, according to economists. This is because different weightings and unexpectedly strong service prices in January's Producer Price Index report may have contributed.

The delayed January?PCE data, due this Friday, is expected to show an increase in core inflation. The PCE data for February will be released on 9 April. The core PCE is expected to increase by 0.5% in January and 0.4% in February, according to economists.

James McCann is a senior economist at Edward Jones, who specializes in investment strategy. He said that another setback in inflation will likely make the central banks more cautious about further interest rate reductions. The Fed could still cut rates this year but the story is increasingly looking like it will be in late 2026 based on inflation expectations.

(source: Reuters)