Holding around its lowest level since May of last year, inflation measured by the consumer price index (CPI) rose 2.4% year over year in February, largely matching economists’ expectations while highlighting an inflection point for inflation prints in months ahead.
The U.S. Bureau of Labor Statistics (BLS) reported Wednesday that prices across the all-categories index increased 0.3% in February compared to 0.2% in January. Excluding volatile food and energy prices, so-called “core” inflation rose 0.2% compared to 0.3% in January, matching January’s 2.5% pace of annual growth.
But although headline and core inflation for February fell mostly in line with estimates of financial data firm FactSet and economists polled by Bloomberg, forecasts that 2026 could usher in a sustained period of descending inflation and stabilizing job conditions have faced elevated uncertainty in recent weeks.
Just eight days after the Supreme Court ruled many of President Donald Trump’s sweeping global tariffs had been imposed illegally, sending administration aides hunting for alternative legal justifications and likely delaying the timeline for additional interest rate easing, Trump’s decision to go to war against Iran on Feb. 28 has again rattled global financial markets.
Average rates on 30-year fixed-rate home loans jumped to almost 6.2% last week, according to recent reporting from the Mortgage Bankers Association — a swing of roughly 20 basis points after spending a sustained period at or just under 6% in the days preceding the war.
A global energy supply shock induced by the war has caused financial markets to reassess their inflation forecasts for 2026 as the cost of nearly every economic activity linked to petroleum and petrochemical supply chains stands to rise commensurate with how long the Strait of Hormuz stays closed.
About 20 million barrels or 20% of daily crude oil flowed through the narrow passage separating the Persian Gulf from the Gulf of Omar in 2024, according to the U.S. Energy Information Administration. Split between Iran’s and Omar’s territorial waters, the strait is 24 miles wide at its narrowest point, and the war has kinked this crucial hose in oil supply.
“For housing, the key story heading into spring is a stronger foundation than a year ago, not day-to-day geopolitical volatility or swings in oil prices,” said Sam Williamson, senior economist at title insurance giant First American Financial Corp., in commentary about Wednesday’s inflation report.
A rate hike was not in the base-case forecasts of any Federal Reserve officials when they last met in late January, but the topic was breached in conversation, according to minutes released in the weeks after their meeting.
“Mortgage rates may remain choppy in the near term as markets sort through inflation and Fed timing,” Williamson added, “but a continued easing trend would leave room for rates to drift modestly lower over time.”
Energy prices gained 0.5% over the month in February, reflecting conditions immediately prior to the beginning of regional war in the Middle East, while food prices saw a yearly rise of 3.1% and monthly gain of 0.4%.
“Higher energy costs could continue with ongoing geopolitical tension which continues to put pressure on oil prices,” commented capital markets advisory firm Mortgage Capital Trading in a daily note to clients. “This is a growing concern as American households continue to face higher borrowing costs, putting a strain on overall affordability.”
CPI inflation, while still above the Fed’s stated target of 2% annual growth, has come in cool to start 2026, while the U.S. central bank’s preferred inflation gauge, the personal consumption expenditures (PCE) price index remains around 3%. Wholesale inflation paid by producers in the supply chain increased in January, driven largely by tariff impacts, economists say.
Core PCE was 3% in December after posting 2.9% growth in November and 2.8% growth in October, according to the most recent government reporting.
Shelter inflation that comprises about 40% of the CPI index continued decelerating last month, with 0.2% growth in February matching the 0.2% growth in January but half the 0.4% monthly gain posted in December.
The Federal Reserve is scheduled to meet for its second two-day policy meeting of the year on March 17 and 18, at which time the Federal Open Market Committee (FOMC) will vote on any adjustments to the federal funds rate, as it seeks to achieve its dual mandate to maintain maximum employment and stable prices.
In recent public remarks, Minneapolis Fed President Neel Kashkari said impacts of the Iran war will affect the FOMC’s evolving monetary policy outlook. Fed officials will also publish updated quarterly forecasts on economic developments and corresponding interest-rate actions when they meet next week.
