Inflation stayed stubbornly elevated in February even as the data landed before the energy shock tied to the U.S. and Israel’s attack on Iran began to ripple through markets. Wednesday’s report showed consumer prices rising 2.4% compared with a year earlier, a pace that matched January’s increase, according to the Labor Department. The report also showed core inflation—excluding volatile food and energy—rising 2.5% over the same span, again matching January.
Because the February inflation snapshot largely preceded the conflict, analysts said it offered less guidance for what comes next. The conflict began when the U.S. and Israel attacked Iran on Feb. 28, sending energy costs soaring as oil prices gyrated and shipping lanes through the Persian Gulf suffered a rare shutdown. Economists said that gas-price increases could filter through the broader cost structure, testing the Federal Reserve’s efforts to bring inflation back toward its 2% target.
On a month-to-month basis, prices rose 0.3% in February from the previous month, up from 0.2% in January. Core prices moved up 0.2% on the month, down from a 0.3% rise in January. The report also showed some pockets of cooling, including rental inflation falling to 0.1% on a monthly basis, the smallest increase in five years, along with new car prices staying unchanged and used car prices falling 0.4%.
Still, grocery prices rose more quickly than in January, a trend that has weighed on family budgets. Grocery prices increased 0.4% in February and were up 2.4% from a year earlier, while gas prices rose 0.8% last month and were down 5.6% compared with a year ago. Clothing costs, meanwhile, jumped 1.3% just in February, which the report linked to tariffs.
Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, said that “Ahead of the energy shock, trends in the consumer price index were relatively tame,” but she cautioned that the Fed’s preferred inflation measure—one that puts less weight on items that are cooling—will likely come in higher when it is reported on Friday. She added that fuel prices are on track to soar 20% this month, “and that’s huge,” and estimated monthly inflation could rise as much as 0.9% this month, which she said would be the highest in four years.
Energy markets already moved sharply since the war began. Oil prices that soared close to $120 a barrel late Sunday fell to $87 by Wednesday after President Donald Trump suggested the conflict would be a “short-term excursion,” the report said. But it also noted Trump has threatened more attacks and there was “no sign of a let-up,” leaving uncertainty about how long higher oil prices could persist.
Companies bracing for higher energy costs are also navigating tariffs, inflation, and rising labor costs. In Kansas City, Isaac Lee Collins, CEO of Fifth & Emery Frozen Yogurt & Chocolate, said rising gas prices will make doing business more expensive, and he described chocolate he imports from France as becoming 15% to 20% more expensive last year mostly due to tariffs. “It’s just another surcharge that we’re going to get hit with,” Collins said. Stew Leonard Jr., CEO of the Stew Leonard’s supermarket chain, said he worries suppliers could raise prices as gasoline costs spike, explaining that trucks deliver meats and fresh produce daily and that higher fuel costs could force customers to see price hikes.
Analysts warned that prices could move higher again if the Strait of Hormuz remains closed. About 20% of the world’s oil and natural gas is shipped through the narrow channel every day, and the report said that on Wednesday a projectile hit a Thai cargo ship off the coast of Oman leading into the strait, setting it ablaze. Wood Mackenzie, an energy analytics firm, said oil could soar to $150 a barrel in the coming weeks if shipments do not resume.
The report said the national average for regular gasoline in the U.S. jumped to $3.58 a gallon Wednesday, citing AAA for an increase of about 20% in one month. While core prices would be less affected in the near term, the report said they could still tick higher over time as higher gas costs push up airline fares, shipping, and other transportation costs.
Federal Reserve officials are also watching the mixed signals from the economy. The report pointed to an unexpectedly sharp jobs drop for February and said the unemployment rate ticked up to 4.4%. With the Fed set to meet next week, the report said the central bank faces a difficult tradeoff: it would normally reduce rates to boost growth and hiring, but it typically keeps rates steady or raises them if inflation is a concern—an outcome Austan Goolsbee, president of the Federal Reserve Bank of Chicago, described as the “worst-case scenario” as uncertainties build. The Fed cut its key rate three times last year before leaving it unchanged at its January meeting, the report said.