Inflation Holds Steady as Economists Warn of Rising Energy Costs Amid Iran War

Key Takeaways

• The latest Consumer Price Index report shows inflation was subdued in February, with slowing price growth for energy and used vehicles.
• Since February’s data was collected prior to the Iran war and skyrocketing energy prices, economists anticipate a hotter report next month.
• Analysts expect the Fed to hold off on a rate cut at its meeting next week.

While the latest Consumer Price Index report indicates 2026 was on the right path toward moderating inflation, economists say the Iran war and spiking energy prices will likely reverse this.

February’s data confirmed the softening inflation trend from January, which fell below economists’ expectations. But with oil prices climbing roughly 20% since the start of the Iran war, economists expect inflation will likely tick back up in the coming months.

“Today’s inflation release could represent the calm before the storm if the Straight of Hormuz remains closed,” says Morningstar senior economist Preston Caldwell, referring to a key chokepoint for global oil flow which borders Iran. “Next month, energy is going to boost headline CPI substantially, unless there is a major reversal in oil prices over the next week.”

Headline inflation rose 0.3% monthly and 2.4% year over year, roughly in line with FactSet consensus forecasts. Core inflation, which excludes volatile food and energy prices, rose 0.2% month over month and 2.5% annually, matching January’s readings.

“While February’s inflation figures remain above the Fed’s stated 2% target, they demonstrate stability,” says Morningstar Wealth chief multi-asset strategist Dom Pappalardo. “However, the recent spike in energy prices, specifically oil, following military escalation in the Middle East could disrupt this price stability. Upcoming inflation reports will garner much more attention than this one, as businesses and consumers have already begun absorbing the higher energy input costs.”

Core CPI was down slightly from January, a signal that softening inflation was continuing in early 2026, according to Northlight Asset Management chief investment officer Chris Zaccarelli. “It seems like we were headed in the right direction in February, but now that this conflict has begun, at least in the short run, we may see things go the wrong way.”

While the latest CPI data is a positive sign, economists say it will likely be on the back burner for the Federal Reserve as it considers an interest rate cut amid soaring energy prices. “The war in Iran takes things in the exact wrong direction when it comes to inflation, so this just further solidifies our belief that the Fed is on hold for the foreseeable future,” Zaccarelli says.

Acceleration In Service Prices, Tariff Effects Vary

“In terms of the February CPI, the recent acceleration has been driven by services,” Caldwell says. He observes that core services inflation was 3.8% annualized in the three months ending February, up from 1.8% in the three months ending November 2025.

“One contributor to this was housing, where the very low inflation readings in October and November may have been due to limited data collection during the shutdown,” Caldwell says. Core goods inflation was 0.6% in the three months ending February, down from 1% as of November. “The numbers suggest that the Supreme Court’s tariff decision may be alleviating pressure on goods prices.”

While economists put a large asterisk on February’s inflation data because of oil prices and the Iran war, several categories were headed in a positive direction with tepid price growth. That includes energy, which rose 0.6% last month. Zaccarelli warns that energy price growth is “going to be much, much higher when we run these numbers next month.”

Prices for used cars, motor vehicles insurance, and personal care also fell last month. Meanwhile, goods prices were varied in February—evidence that tariffs are having a mixed effect across the economy, according to Zaccarelli. Household furnishings and apparel saw price increases in February, while television prices fell.

Food prices also remained elevated in February, despite analyst expectations that they would fall. “They remain a bone of contention among policymakers,” says LPL Financial chief economist Jeffrey Roach.

Fed Poised to Keep Interest Rates Unchanged

With inflation expected to firm in the coming months, virtually all market participants expect the Fed to keep rates at their current 3.50%-3.75% range at its next meeting, according to CME’s FedWatch tool. Less than 1% predict a quarter-point cut.

While this spike is likely to be a “temporary phenomenon,” Janus Henderson Investors portfolio manager John Kerschner thinks oil prices could settle at elevated levels, which clouds the picture for the Fed. “While today’s inflation numbers give the market some relief, we could very well be facing some nasty inflation prints in the months to come which the Fed may, or may not, be able to look through,” he explains.

The Fed is likely to maintain interest rates in their current range for the first half of 2026, says Kerschner. But looming inflationary pressure and February’s lackluster labor market will complicate things for Kevin Warsh, who is set to succeed Jerome Powell as chair this summer. “While Powell has some cover, since his term is up in May, Warsh faces a difficult decision in cutting rates, especially if the labor market continues on its feeble path,” he says.

With a short-lived war, Zaccarelli says elevated energy prices and inflation will likely be temporary, leaving room for the Fed to cut rates later in the year. But a long-term conflict could take that off the table. “The Fed definitely has an opportunity to cut rates by the end of the year,” Zaccarelli says. “But that’s only if this conflict subsides and then things reverse course.”