US consumer inflation steady before Iran conflict drives up oil prices

WASHINGTON, March 11 (Reuters) – U.S. consumer prices rose moderately in February as rents maintained a steady pace of increases, though households paid more for gasoline and at the supermarket and higher costs are in store because of the escalating war in the Middle East.

The Consumer Price Index report from the Labor Department on Wednesday, which also showed underlying inflation muted last month, covered the period before the U.S. and Israel launched strikes against Iran. The attacks at the end of February were met with retaliation by Tehran and have boosted oil prices.

Gasoline prices have soared 20% to $3.58 per gallon since the war started, data from motorist advocacy group AAA showed. Prices at the pump had already been rising in anticipation of the hostilities in the Middle East.

Economists estimated that consumer prices could increase by as much as 1.0% in March and expected the Federal Reserve to keep interest rates unchanged next week.

“A steady inflation reading would probably be a welcome data point on any other day, but against the current backdrop of geopolitical uncertainty and surging oil prices, it may not carry as much weight in the markets, or with the Fed,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.

The Consumer Price Index rose 0.3% last month after gaining 0.2% in January, the Labor Department’s Bureau of Labor Statistics said. In the 12 months through February, the CPI advanced 2.4%, matching January’s increase, and reflecting last year’s high readings dropping out of the calculation. The increase in the CPI was in line with economists’ expectations.

The U.S. central bank tracks the Personal Consumption Expenditures price indexes for its 2% inflation target.

The rise in the CPI reflected a 0.2% gain in owners’ equivalent rent of primary residence, which is what a homeowner would receive from renting a home, after a similar rise in January. Primary rents climbed 0.1%, the smallest gain since January 2021. Economists, however, argued that rents were being distorted by last year’s government shutdown, which prevented the collection of October inflation data.

“In normal times, these prints would be benign,” said Gregory Daco, chief economist at EY-Parthenon. “But these are far from normal times, and the data must be interpreted through the lens of distortions from the government shutdown, unprecedented trade policy volatility, and record swings in energy prices tied to the conflict in the Middle East.”

Daco estimated last year’s record 43-day shutdown was causing CPI inflation to be understated by roughly 0.3–0.4 percentage points.

Gasoline prices increased 0.8% after declining for two straight months. Oil prices shot up well above $100 per barrel earlier this week, before pulling back. They rebounded on Wednesday as traders doubted whether the International Energy Agency’s proposal for a record release of reserves could offset potential supply shocks from the Iran war.

Economists expected gasoline prices to top $4 per gallon soon. Though electricity prices eased on a monthly basis, they jumped 4.8% from a year ago because of strong demand from data centers to power artificial intelligence. Prices for piped gas used by households soared 3.1% last month. They rose 10.9% year-on-year.

Food prices shot up 0.4% last month, lifted by a 3.7% jump in the cost of candy and chewing gum. Fruit and vegetable prices increased 1.4%, while nonalcoholic beverages cost 0.8% more. But prices for dairy and related products dropped 0.6% and the cost of cereals and bakery products fell 0.2%. Food prices are 3.1% higher than a year ago.

RISING FOOD AND GASOLINE PRICES ARE SQUEEZING CONSUMERS

The Trump administration sought to highlight the moderate increases in the CPI as a sign of cooling overall inflation, with a White House spokesperson posting on social media that the nation would “see even greater economic progress,” once the disruptions from war are over.

Rising food and gasoline prices are, however, a political risk for Trump and his Republican Party heading into the midterm elections in November.

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. U.S. Treasury yields were higher.

The CPI also increased amid the continued, but staggered pass-through from Trump’s sweeping tariffs, which he pursued under a law meant for use in national emergencies that have since been struck down by the U.S. Supreme Court.

Though businesses have absorbed much of the import duties, economists said they were unlikely to continue doing so, citing among others persistently higher readings of input costs in the Institute for Supply Management surveys. Trump has responded to the Supreme Court ruling by imposing a 10% global tariff, which he said would rise to 15%.

Excluding the volatile food and energy components, the CPI gained 0.2% after rising 0.3% in January. The so-called core CPI inflation was curbed by a third straight monthly decline in used motor vehicle prices, as well as the smaller increase in rents.

But apparel prices surged 1.3% while the cost of household furnishings and operations rose 0.3%, reflecting the pass-through from import duties.

Healthcare costs increased 0.5%, with hospital services shooting up 0.6% and prices for physicians’ services rising 0.3%. Prescription prices, however, fell 0.2%. The cost of hotel and motel rooms rebounded 1.1%. Airline fares rose 1.4% and could rise further as the war boosts jet fuel prices.

In the 12 months through February, the core CPI increased 2.5% after rising by the same margin in January, also reflecting favorable base effects.

Economists said the tame core CPI readings were unlikely to translate into moderate core PCE inflation gains in February because of different weights and unexpected strength in services prices in the January Producer Price Index report.

January’s delayed PCE price index data due on Friday is expected to show a solid increase in core inflation. February’s PCE inflation data will be released on April 9. Economists forecast core PCE increasing by as much as 0.5% in January, with estimates for February as high as 0.4%.

“In the near term at least, another inflation setback will probably make the central bank cautious when it comes to further interest rate cuts,” said James McCann, senior economist, investment strategy at Edward Jones. “The Fed can still cut this year, but this is looking increasingly like a late 2026 story based on the near-term inflation outlook.”

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(Reporting by Lucia Mutikani; Editing by Aurora Ellis, Chizu Nomiyama and Andrea Ricci)