Quiet February Inflation Mooted by Iran War

Key Highlights:

• February’s inflation was steady and will keep the Fed on hold in its March meeting
• The inflation outlook from here, and the Fed’s future responses, will depend on what happens to oil prices as a result of the ongoing war in the Middle East

February Inflation and the March Fed Meeting

The February CPI release was completely in line with the market’s expectations of 2.5% core inflation and 2.4% headline inflation. That also puts them in line with the prior month’s figures.

This data confirms that in the run-up to recent actions in the Middle East, inflation was somewhat sticky, at a level just above the Fed’s target. With the exception of the one-off impact of tariffs in 2025, inflation has generally been decelerating since mid-2022. That continues, but at a much more gradual pace. Shelter inflation, which has been both sticky and a large part of consumer spending, eased again this month. Based on the decline in house prices experienced over the past year and half, we expect that to continue, though it may be approaching a trough.

Given that backdrop, the Fed’s comments, and the latest events, we (and the market) expect the Fed to remain on hold on rates at its March meeting.

War, Oil, and Inflation

Due to the war in Iran and the shutdown of the Strait of Hormuz, February’s data tell us little about inflation from here. The big issue going forward is the price of oil. If oil prices stay elevated, headline inflation will increase almost immediately; the pass-through to fuel prices is quick. Core inflation will be impacted as well, but by a smaller amount and with a longer lag. We wouldn’t expect that to put the Fed in a position where they consider hikes, unless the situation worsens materially, but it may force them to hold off on rate cuts, which would have been forthcoming otherwise.

As a baseline, oil prices staying in the $90–$100 range would imply inflation being higher by around 40–50 bps (which would also be partially mitigated by other drivers such as the strength of the dollar and higher uncertainty). Oil around $75–$80 would have around a 30 bps impact (likewise partially mitigated by other factors) and oil getting to $120–$140 would push inflation up by over a percentage point (with less mitigation from other drivers). Higher oil also introduces demand destruction and poses a headwind to growth—with the impact on the level of GDP potentially ranging from 10 to 50 bps.