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The Bureau of Labor Statistics released February’s consumer price index on Wednesday morning, and the headline number — 2.4 percent year-over-year — arrived precisely where Wall Street expected it. The core reading, at 2.5 percent annually, also matched consensus. For a brief moment, the data offered a rare commodity in the current economic environment: certainty. That window will not last long. The oil shock triggered by the US-Israeli strikes on Iran, which sent Brent crude above $120 per barrel at one point last week before settling back near $100, has not yet appeared in any CPI release. It will, beginning with the March data published in April.
What the February Report Showed
On a monthly basis, the all-items CPI rose 0.3 percent in February, up from the 0.2 percent recorded in January, according to the Bureau of Labor Statistics release dated March 11. The year-over-year rate held at 2.4 percent, unchanged from the prior month. Core CPI, which excludes food and energy, posted a 0.2 percent monthly gain and a 2.5 percent annual rate — both exactly in line with the consensus forecast compiled by major financial institutions ahead of the release.
Shelter remained the single largest contributor to the monthly increase, rising 0.2 percent. Within that category, rent of primary residence climbed just 0.1 percent — the smallest monthly advance since January 2021 — a development that analysts described as a tentative signal of continued disinflation in one of the stickiest components of the index. The food index rose 0.4 percent for the month and was up 3.1 percent from a year ago. Egg prices, which had driven much of the food acceleration in earlier readings, fell 3.8 percent in February and are now down 42.1 percent year-over-year, a reversal attributed to the easing of avian flu disruptions.
The apparel index attracted particular attention among economists monitoring tariff pass-through. Clothing prices rose 1.3 percent in February, the largest monthly jump since September 2018 — a period that also coincided with the first round of US-China trade tensions. The Trump administration’s 15 percent global tariff package, effective from February 24, is not yet fully embedded in the February CPI given the timing of price collection, meaning further apparel and goods price acceleration may appear in subsequent months. Energy rose 0.6 percent for the month and was up just 0.5 percent on an annual basis — a figure that will look entirely different by April, given the trajectory of crude prices since February 28.
The Shutdown Distortion
Interpreting the February reading requires an additional layer of caution. The 43-day government shutdown that began in the autumn of 2025 forced the Bureau of Labor Statistics to suspend data collection for most of October and to rely on a carry-forward methodology for portions of the November report. As economists at Fox Business and J.P. Morgan have noted, this statistical disruption is likely to impart a modest downward bias to CPI readings from December 2025 through approximately April 2026, when sufficient new survey data will displace the carried-forward figures. The implication, as the Federal Reserve’s own staff are aware, is that the current run of apparently benign inflation prints may slightly understate the true underlying price level — a caveat that complicates the central bank’s ability to act on the data with full confidence.
The Iran Variable and What It Means for March Data
The February CPI report is, in one important sense, a historical document. It captures price conditions before the most significant energy shock to hit global markets since Russia’s full-scale invasion of Ukraine in 2022.
The US-Israeli military operation against Iran, launched on February 28, effectively halted tanker traffic through the Strait of Hormuz — the chokepoint through which approximately 20 percent of global oil supply normally flows. Brent crude futures, which traded near $70 per barrel before the conflict, reached $103 per barrel on March 9 as cited by CNBC, briefly spiking close to $120 during intraday trading before retreating. As of Wednesday, oil remains elevated, with markets still pricing a substantial geopolitical risk premium. Goldman Sachs Research estimated that premium at approximately $14 per barrel as of March 3, corresponding to the effect of a full four-week halt in Hormuz flows, according to a note from Daan Struyven, co-head of Global Commodities Research.
The consequences for American consumers are already visible. The national average gasoline price reached $3.539 per gallon as of Tuesday, according to the American Automobile Association, representing an increase of more than 17 percent since the war began. Gulf Oil analyst Tom Kloza warned that diesel prices could reach $4.50 to $5 per gallon and gasoline could approach $4 in many markets if the Strait of Hormuz remains closed into next week. Aramco chief executive Amin Nasser described the situation in unusually stark terms, stating that the disruption was “by far the biggest crisis the region’s oil and gas industry has faced” — a characterisation published on the company’s website following its full-year earnings release on Tuesday. Neil Atkinson, former head of oil industry at the International Energy Agency, told CNBC on Monday that the world was facing a potentially “game-changing and unprecedented energy crisis.”
For the inflation trajectory, the arithmetic is straightforward, if the magnitude remains uncertain. Energy accounts for approximately 7 percent of the CPI basket directly, with significant indirect exposure through transportation, manufacturing input costs, and food production. A sustained increase in gasoline prices of 17 percent, if it persists through March, would add roughly 0.4 to 0.5 percentage points to the monthly energy component alone — more than reversing the February reading. Goldman Sachs has separately warned, as reported by Reuters, that if the oil shock persists, US gasoline could settle at $3.50 per gallon and inflation would become a more permanent problem.
The Federal Reserve’s Position
Wednesday’s data reinforced the Federal Reserve’s policy posture without meaningfully altering it. The probability of a rate hold at the March 17-18 Federal Open Market Committee meeting rose to 99.3 percent following the CPI release, up from 98.3 percent the previous week, according to the CME FedWatch tool. The federal funds rate currently sits at a target range of 3.5 to 3.75 percent, following three consecutive 25-basis-point reductions in late 2025.
The January meeting, at which the committee voted 10-2 to hold, produced minutes (published February 19) that reflected genuine internal division. Two voting members, Stephen Miran and Christopher Waller, preferred a quarter-point cut. More notably, several participants indicated they would have supported a “two-sided” description of future rate decisions — language that would explicitly acknowledge the possibility of rate increases if inflation fails to continue its descent. That formulation did not make it into the January statement, but its near-inclusion signals that the bar against resuming tightening is not as high as markets had assumed entering 2026.
The March 18 meeting carries additional significance because it includes the first updated Summary of Economic Projections of the year, including the dot plot of individual rate expectations. The December 2025 dot plot showed a median projection of one 25-basis-point cut for the full year of 2026, with the terminal rate settling near 3.0 to 3.25 percent. Whether the Iran shock and its inflationary consequences cause the committee to revise that projection downward — toward zero cuts — will be the central market question of Wednesday’s session. J.P. Morgan’s strategists continue to expect one cut in 2026, most likely in the summer. Traders on Wednesday were assigning approximately a 43 percent probability to a second cut by year-end, according to CME data, though that figure has been highly volatile since the onset of the conflict.
The tenure of Fed Chair Jerome Powell adds a further layer of complexity that no dot plot can fully price. Powell’s term expires on May 15, 2026. President Trump officially nominated Kevin Warsh on January 30, with the formal Senate transmittal following on March 4. The confirmation process is currently stalled: Senator Thom Tillis of North Carolina, a key vote on the Senate Banking Committee, has vowed to block any Fed nominee until the Justice Department’s ongoing criminal investigation into Powell — stemming from his testimony to the committee regarding the Fed’s headquarters renovation — is resolved. Warsh, a former Fed governor from 2006 to 2011 and a Hoover Institution fellow, is widely regarded by markets as more hawkish than Powell on rates. Any shift in the central bank’s reaction function under new leadership, whenever it arrives, would carry implications for the second half of 2026 that the current dot plot cannot yet incorporate.
The Outlook
What Wednesday’s data delivered, in effect, was the last unambiguously clean inflation reading the Federal Reserve will have before it must incorporate the consequences of a major energy shock into its policy framework. The ISM prices paid index printed 70.5 in February — the highest reading since June 2022, and one that reflected cost pressures building in manufacturing well before the Iran conflict began — narrowing the committee’s room to absorb an energy-driven inflation resurgence without policy response. Core PCE, the Federal Reserve’s preferred inflation gauge, was running at approximately 2.9 to 3.0 percent as of December 2025 — the most recently available reading, with January data due from the Bureau of Economic Analysis on March 13, still well above the 2 percent target, narrowing the committee’s room to absorb an energy-driven inflation resurgence without policy response. The March CPI release, due in April, will provide the first definitive measurement of how much of the oil shock has translated into consumer prices. Until then, the Federal Reserve convenes on March 18 with a dataset that answers last month’s questions and leaves the most consequential ones open.
