CPI on tap: Inflation seemed to slow before Iran conflict jacked up oil prices. But did it really?

By Jeffry Bartash

Interest-rate cuts from the Fed appear more distant due to fresh inflation

Rising gasoline prices are the latest headache for the Federal Reserve.

Oil prices have surged since the start of the conflict with Iran and American consumers are going to suffer the consequences at the gas pump, but the higher cost of energy won't show up in the latest reading on U.S. inflation.

The consumer-price index for February, due Wednesday, is expected to show another above-average increase. Yet it probably won't be enough to ruffle feathers on Wall Street, especially with investors focused on Iran.

Here's what to watch in the CPI - and what it means for Wall Street and the Federal Reserve.

Cost of living

Consumer prices are forecast to rise 0.3% in February, a touch faster than what it would take to get the rate of inflation down to the Fed's target.

The central bank is aiming to lower the annual increase in the cost of living to 2% or less.

The yearly rate of inflation is likely stay at 2.4% for the second month in a row, down sharply from a recent peak of 3% early last fall.

That looks good, but many economists believe the government shutdown last fall has led the CPI to understate inflation.

How come? Economists at the Bureau of Labor Statistics were not able to collect all the usual price data in October and November because they were furloughed and unable to work.

The Fed's preferred inflation gauge, known as the PCE index, shows inflation running closer to 3%.

Whatever the case, the most important thing is that inflation not show signs of worsening. The financial markets, already on edge due to rising oil prices, could react badly if the CPI is higher than expected.

The CPI is "still an important number, as markets will be hoping for a soft starting point to help cushion the potential inflationary pick-up resulting from higher energy costs," investment strategist BeiChen Lin of Russell Investments said in a research note to clients.

Oil in focus

The Fed likes to focus on trends in inflation excluding food and energy. Those two categories can swing up and down abruptly in the short run and distort inflation readings - precisely what oil is likely to do in the next few months.

The CPI minus food and energy, known as the core rate, is forecast to rise a modest 0.2% in February. Oil prices were fairly low last month.

The 12-month rate of core inflation is seen holding at 2.5% for the second straight month.

The problem, of course, is that oil prices have soared in March. It's too soon to tell how much higher energy costs will affect overall U.S. inflation. That will depend on how long the Iran conflict lasts and oil prices remain high.

Goods and services

Before the conflict with Iran erupted, the only way inflation was likely to get worse in 2026 was if the Trump administration's newly imposed tariffs raised the cost of goods.

The White House put in place new duties under a different law after the Supreme Court in February struck down prior tariffs. The full effects won't be felt for another month or two - and they are under legal challenge, too.

The cost of "core" goods was actually unchanged in January, in a positive sign. These are things like wine, clothes, appliances and foreign cars that are most affected by tariffs.

Flat prices for goods in January probably were just a brief respite. Analysts say the costs of older tariffs are still filtering through the economy and could nudge goods inflation higher in the next several months.

Just as worrying is the cost of services, which rose sharply in January, led by a large increase in airfares.

Another big increase in services prices in February, though not expected, would be a worrisome sign.

The cost of services was the biggest source of inflation before the Trump tariffs, and if they start rising gain, the Fed would be in a tough spot.

Fed reaction

Fed officials hope to see signs that inflation was contained in February, but the report was never going to sway the central bank to cut interest rates at its next meeting in eight days.

The Iran conflict only complicates the Fed's job.

Normally, the Fed looks past oil when it tries to assess inflation trends and set borrowing costs. Yet a prolonged period of higher oil prices could push inflation back up to 3% or more.

Such a scenario could delay or even push off any Fed rate cuts this year.

On the flip side, the Fed might be more inclined to cut rates if higher oil prices were to impair the U.S. economy, raise layoffs or cause companies to hire even less. Job creation is already very low.

At this point, the Fed leadership will watch and wait to see how the situation in Iran unfolds.

-Jeffry Bartash

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03-10-26 1109ET