Underlying inflation in the United States eased in February compared to the previous month, offering some relief to price pressures prior to the outbreak of conflict involving Iran. Data from the U.S. Bureau of Labor Statistics indicated that the core Consumer Price Index (CPI), which excludes food and energy, rose 0.2% from January. The year-over-year increase remained unchanged at 2.5%, marking the slowest growth rate in nearly five years. The report revealed that although costs for gasoline and grocery items, including fresh vegetables and coffee, increased, declining prices for used cars and motor vehicle insurance helped curb inflation last month. After demonstrating persistent strength through much of last year, inflation has generally trended downward in recent months. However, renewed inflation concerns triggered by the Iran conflict—which has already driven up costs for oil, gasoline, and fertilizer—could intensify anxieties about the cost of living for Americans ahead of the midterm elections later this year.
Federal Reserve officials are expected to keep interest rates unchanged at their policy meeting next week, a forecast made before the latest developments in the Middle East. Because the conflict threatens to push inflation higher—at least in the short term—some investors now believe the Fed may maintain current interest rates for a longer duration. Nevertheless, policymakers must also remain attentive to ongoing vulnerabilities in the labor market.
Sal Guatieri, Senior Economist at BMO Capital Markets, noted, "Before this energy price shock, inflation did appear to be stabilizing, and we are seeing some evidence that the impact of tariffs on inflation is now fading." Following the report's release, stock index futures declined and Treasury yields rose. Traders continue to anticipate that the Fed will not cut interest rates again until the second half of 2026.
A detailed look at inflation components shows that the moderation in core inflation also reflected softer housing costs—one of the largest components within the CPI. A key metric known as "rent of primary residence" increased by just 0.1%, the smallest rise in five years. Prices for goods excluding food and energy showed little change. However, the report indicated that for certain items such as apparel and household appliances, businesses may be attempting to pass on tariff-related costs to consumers.
During the month, essential household items like groceries, gasoline, and piped gas became more expensive. Fresh vegetable prices, including lettuce and tomatoes, recorded their largest increase since 2017, while coffee costs also rose. Prices for eggs and butter continued to decline. Although gasoline prices had already been rising before the conflict began, they have surged since then due to disruptions in global oil supplies caused by the hostilities. According to the latest data from the American Automobile Association (AAA), the price per gallon at the pump has climbed from $2.98 before the attack on Iran to $3.58.
Including food and energy costs, the overall CPI increased 0.3% from January and was up 2.4% compared to the same period last year. The cost of living continues to weigh heavily on many Americans, with consumers facing elevated prices across nearly all categories in recent years. Although the Supreme Court last month overturned much of the broad tariff policy implemented under the Trump administration, the government has moved to impose taxes through other channels, further clouding the inflation outlook.
Beyond the conflict, strong inflation at the wholesale level also poses a threat to consumer prices. According to the Institute for Supply Management (ISM), the Producer Price Index has shown robust growth in recent months, with input prices for manufacturers rising in February at the fastest pace since 2022. However, the ISM's Services Price Index cooled last month.
A key services sector metric closely monitored by the Federal Reserve—which excludes housing and energy costs—increased 0.4%, slower than in January but still elevated. While central bank officials emphasize the importance of such indicators when assessing the inflation trajectory, they calculate this measure using a separate index. This gauge, known as the Personal Consumption Expenditures (PCE) Price Index, draws on CPI data for certain cost calculations. January PCE figures are scheduled for release on Friday. Because categories such as housing and healthcare carry different weights across the two measures, the indexes may diverge early in the year.
A separate report from the Labor Bureau on Wednesday showed that average hourly earnings, adjusted for inflation, posted the largest year-over-year increase since May.