Before the ramp-up in oil prices and associated impacts from the Iran war, the Federal Reserve’s preferred inflation gauge increased 0.4% in February to reflect 2.8% growth from year-ago levels, matching January’s pace.
Updating its closely watched personal consumption expenditures (PCE) index on Thursday, the Bureau of Economic Analysis reported that core PCE inflation, which excludes volatile food and energy prices, rose 3% over the year in February after a 0.4% monthly increase.
February’s figures matched consensus expectations for PCE inflation in February, according to economists polled by Reuters, in what represents the last clean read on inflation since before the U.S. and Israel began their attack on Iran on Feb. 28.
Across the all-items index, goods prices rose 0.7% in February, the fastest monthly increase in the past year and a notable gain from the flat monthly price growth in January. Goods prices rose 1.2% yearly, slightly lower than the 1.3% annual growth in January.
Meanwhile, services inflation across the all-items index was 3% higher in February than a year ago, slowing to 0.2% monthly growth from 0.4% in January. Housing-related services inflation rose 1% over the year in February after a slowdown to 0.6% growth in January.
While Thursday’s figures fill in the broader inflation picture for Federal Reserve policymakers, the prewar nature of the numbers render them largely obsolete concerning their impact on forward-looking expectations for U.S. monetary policy.
Minutes released from the last Federal Open Market Committee (FOMC) meeting in mid-March underscore Fed officials’ cautious approach to additional interest rate cuts in 2026 as economic impacts of the Iran war have only begun to unfold. FOMC members almost unanimously voted to maintain the federal funds rate at its current range of 3.5% to 3.75% during that meeting.
“Participants noted that a prolonged conflict in the Middle East would likely lead to more persistent increases in energy prices and that these higher input costs would be more likely to pass through to core inflation,” the minutes read.
As a result, “the vast majority of participants” noted that downward progress to the Fed’s stated 2% target for annual inflation “could be slower than previously expected and judged that the risk of inflation running persistently above the Committee’s objective had increased,” the minutes continued.
Updated consumer price index figures for March due out Friday will present the first full month of official inflation data since the Iran war broke out. Headline CPI rose 2.4% annually in February while core CPI rose 2.5%.
An inflation “nowcasting” index updated daily by the Federal Reserve Bank of Cleveland projects headline CPI will come in around 3.25% — fueled by immediate energy price hikes from the war — while core CPI could be around 2.6%.
Median forecasts of economists polled by The Wall Street Journal suggest headline CPI will be 3.3% and core CPI will be 2.7%, roughly matching the Cleveland Fed projections.
But it’s upcoming months of inflation and employment data through the late spring and summer that will shape policy outlooks as the Trump administration seeks an offramp to Middle East hostilities and the Fed seeks to balance its dual mandate to maintain stable prices and maximum employment.
Initial government estimates of March employment show employers added 178,000 jobs last month, but about three-quarters of those gains were concentrated in the health care, social services and hospitality sectors. The jobless rate, meanwhile, ticked down to 4.3% from 4.4% the previous month and a six-month high of 4.6% in November.
Industry experts threw cold water on the hot headline figures, telling Scotsman Guide that March labor data largely does not yet reflect impacts of the Iran war on hiring trends, given that the government’s jobs survey data is collected in the second week of the month, before wider impacts on the economy had materialized.
