Inflation stabilized last month before the attack on Iran led to higher energy costs

KANSAS CITY (AP) — Inflation remained stubbornly high last month as gas prices rose in a snapshot of what consumer prices looked like before the U.S.-Israel attack on Iran sent energy costs soaring.

The Labor Department said Wednesday that consumer prices rose 2.4% in February from a year earlier, matching January’s increase of 2.4%. Excluding the volatile food and energy categories, core prices rose 2.5% from a year ago, which is also in line with January’s level, which was the lowest in five years. Both numbers exceed the Federal Reserve’s target of 2%.

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The conflict, which began when the United States and Israel attacked Iran on February 28, outpaced data on Wednesday, causing wild swings in oil prices as shipping lanes across the Persian Gulf were subjected to rare closures. Gas prices have already jumped and are expected to push inflation much higher when this month’s inflation data is published in early April.

Rising prices will pose a challenge to officials at the Federal Reserve and could slow consumer spending, which drives two-thirds of the nation’s economic growth each year. The surge could be a one-time event, likely to be reversed if the war ends soon, as President Donald Trump has hinted. But the spike in gas prices threatens to exacerbate inflation for at least a few months, as Americans are already exhausted by nearly five years of stubbornly high prices. “Affordability” is already a thorny political issue for Republicans in Congress who will face voters in the midterm elections later this year.

On a monthly basis, prices rose by 0.3% in February compared to the previous month, compared to 0.2% in January. Increases at this pace over an extended period would push annual inflation higher. Core prices rose just 0.2%, down from a 0.3% rise in January.

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Grocery prices rose more quickly, continuing a trend that has hurt household budgets. It rose 0.4% in February and was up 2.4% from a year earlier. Gas prices rose 0.8% last month, despite falling 5.6% compared to last year.

Oil prices rose to nearly $120 a barrel late Sunday before falling to nearly $87 by Wednesday after Trump suggested the conflict would be a “short trip.” However, he has also threatened continued attacks and it is not clear when the conflict might end.

Some analysts warn that prices will rise significantly if the Strait of Hormuz remains closed, removing nearly three-quarters of oil production in the Persian Gulf region from global markets, according to energy analytics firm Wood Mackenzie. On Wednesday, a projectile hit a Thai cargo ship off the coast of the Sultanate of Oman in the Strait of Hormuz, causing it to catch fire.

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Iran is also targeting oil fields and refineries in Gulf Arab states, aiming to generate enough global economic pain to pressure the United States and Israel to end their strikes.

The company expects oil prices to rise to $150 per barrel in the coming weeks if shipments do not resume.

That would push gas prices higher in the United States, where they jumped to $3.58 per gallon on average across the country on Wednesday, according to AAA, an increase of about 20% in just one month.

Higher oil prices will raise other costs as well, including airfares and shipping costs, which could make groceries and restaurant meals more expensive.

At the same time, given the volatility of oil prices – US crude oil prices rose 3% on Wednesday after falling about 9% to $86.55 the previous day – it is difficult to predict the size of the impact. If shipments resume in a week or so, gas prices will likely fall fairly soon, although they usually fall much more slowly than they rise.

Laura Rosner Warburton, chief economist at consultancy MacroPolicy Perspectives, expects inflation to jump as much as 0.9% in March from the previous month, when that data arrives in early April. This would be the largest monthly gain in nearly four years. Annual inflation could easily exceed 3% in this case and perhaps approach 4% in the following months.

Rosner Warburton said the jump in gas prices so far this month is the largest since March 2022, and before that since June 2009.

“This is huge,” she said. “Increases of this magnitude are highly unusual.”

Base prices will be less affected this month, but may rise over time as higher gas prices drive up airline rates, shipping and other transportation costs. Core inflation is expected to rise by 0.3% in February compared to the previous month.

Even if the sharp rise is short-lived, it will almost certainly delay any interest rate cuts by the Federal Reserve, which meets next week. It cut its key interest rate three times last year before leaving it unchanged at its last meeting in January.

The Fed is already closely divided on whether it needs to keep the interest rate at its current level of about 3.6% to push inflation down closer to its 2% target, or whether it should cut the interest rate to support borrowing, spending and hiring.

Last Friday, the government announced an unexpectedly sharp job loss in February, with employers cutting 92,000 jobs and the unemployment rate rising to 4.4% from 4.3%.

The weak jobs report puts the Fed in a particularly difficult position: They usually cut interest rates to boost growth and hiring, but they usually raise rates — or at least keep them where they are — if they are worried about inflation.

“This is always the worst-case scenario for a central bank,” Chicago Fed President Austan Goolsbee told Bloomberg on Friday. “While we have more uncertainties, I kind of think that the time when it makes sense to act is constantly being pushed back.”

The Fed typically expects an oil price shock to have at most a temporary impact on inflation, and may cut interest rates if the economy needs to lower borrowing costs, said Gregory Daco, chief economist at EY-Parthenon, a consulting firm.

But Daco said Fed policymakers were burned out just a few years ago when they initially said the post-Covid inflation spike in 2022-2023 — the worst in four decades — would be temporary. As a result, they will be reluctant to risk a premature cut in interest rates. Some officials even mentioned during the January meeting that they might have to raise interest rates soon, rather than cut them, according to meeting minutes — and that was before the Iran war.

“They don’t want to get burned again,” Daco said.