Inflation held steady in February until just before the United States attacked Iran. Now U.S. oil prices are surging, and prices overall will do the same.
The Consumer Price Index (CPI), released on Wednesday by the Bureau of Labor statistics, rose 2.4% from a year ago, the same rate as in January 2025. Prices went up slightly, 0.3% over January. Energy prices have risen since the Iran war began on Feb. 28: Oil prices have spiked 11.1%, one of the highest percentage increases in that short period of time in history.
If this war continues, it will take quite some time for overall prices to then return to pre-war levels. Energy prices, affected by the surge in oil prices, are crucial to consumers and could significantly disrupt their finances, especially in low-income households.
The initial strike on Iran damaged oil refineries, and the Strait of Hormuz, the center of global oil transport, has been physically disrupted. With the strait open but limited and regarded as dangerous, tanker insurance and other transportation costs have skyrocketed, immediately raising gasoline and fuel oil prices.
With overall inflation expected to rise next month, changes in consumer purchasing patterns because of the oil price hike will play an important role in the Fed’s decision on interest rates.
“The Fed is definitely on a tight spot,” said Fiona van der Stuer, an associate economist at Wolfe Research. “The Fed will certainly stick to a 2% inflation target, but they won’t be waiting for inflation to return to 2% year of year before they adjust the policy rate.”
Economists expect that the Iran war will raise the CPI an additional 0.4% in coming months.
Fed policy makers are focusing on the Personal Consumption Expenditures (PCE), to be released this month. With overall inflation expected to rise next month, changes in consumer purchasing patterns because of the oil price hike will play an important role in the Fed’s decision on interest rates.
“From the data, we are estimating core PCE to be running at 3% in February,” van der Stuer said. She warned that even though the core CPI released today looks soft, rising prices may drive the PCE higher, making the Fed hesitant to cut interest rates.
Kay Park, a 32-year-old mental health counselor who lives in Boston, is stressed out because she is spending $20 more a week on gasoline than before the war.
“Now I really need to find a way to save money,” Park said.
She has changed the driving mode of the car to ECO mode to save the fuel, and planned to save money by reducing spending on dining out, if the war and price increases continue.
Prices of the super core services, excluding food, energy and shelter, jumped 0.4% in January and 2.8% from a year ago, according to Diane Swonk, the KPMG chief economist.
The super core services are influenced heavily by labor costs, and these price increases suggest that the inflation is going up for reasons beyond the temporary supply shock caused by tariffs and the Iran war.
“We learned during the pandemic that production is easier to idle than restart, which will add to scarcities,” Swonk said in her analysis.
Many consumers, especially those receiving tax refunds, continue to spend despite soaring prices, discouraging the Fed from lowering interest rates to control inflation. But others are holding back, worried that the Iran war will drive prices even higher.
Given that the current labor shortage caused by immigration policies is also likely to raise costs, Swonk said, the Fed needs to be cautious about viewing higher inflation as temporary.
