The Labor Department's consumer price report for February is expected to show a pickup in headline inflation as gasoline costs climbed ahead of an intensifying conflict in the Middle East and businesses continued to pass some import duties into consumer prices. Economists surveyed anticipate the Consumer Price Index rose modestly last month even as some underlying components eased.
Surveyed forecasters see the CPI increasing 0.3% in February, up from a 0.2% rise in January. Forecasts range from a 0.1% uptick to a 0.3% gain. On a 12-month basis, the CPI is estimated to have advanced 2.4% through February, matching January's year-over-year change and reflecting the fading influence of last year's higher readings on the comparison.
Analysts point to gasoline as a principal factor behind the likely jump. Gasoline prices are estimated to have risen about 0.8% in the CPI report after two months of declines. Motorist advocacy group data show pump prices have surged by more than 18% to $3.54 per gallon since the U.S.-Israeli war on Iran started at the end of February. Oil futures briefly climbed well above $100 per barrel before retreating on Tuesday after the president said the war could end soon.
"The February CPI is likely to show that progress on lowering inflation is stalling out again," said Sarah House, a senior economist at Wells Fargo. She noted that although the conflict in the Middle East began at the end of February, oil and gasoline prices were already moving higher last month in anticipation of an escalation.
Even with the anticipated headline move, core inflation - which excludes volatile food and energy categories - is expected to have softened relative to January. Forecasters project the core CPI rose 0.2% in February after a 0.3% increase the prior month. That moderation is attributed to lower used motor vehicle prices and smaller increases in rents and airfares, which together are likely to have tempered the core reading.
At the same time, several goods categories probably saw firmer price action as companies passed on higher import duties to consumers. Apparel and household furnishings are among the items likely to have posted solid gains. January's Producer Price Index illustrated widening margins in several retail segments, including apparel, footwear and accessories, suggesting retailers have been shifting costs downstream.
Those tariffs were initially pursued under a statutory authority intended for national emergencies and were later struck down by the U.S. Supreme Court. In response to the court decision, the president has moved to impose a 10% global tariff, which he said would later rise to 15%. Economists warn that the pass-through of tariffs into consumer prices has been staggered and could continue to be transmitted over time as input costs remain elevated.
"The trouble is that there is evidence that input costs continue to escalate, even as the level of tariffs has mostly stabilized," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "The pass-through dynamic could persist for a while."
Beyond energy and goods, food prices are another channel where the conflict could exert upward pressure. Andy Schneider, a senior U.S. economist at BNP Paribas Securities, noted that a recent roughly 15% jump in oil alone implies a 0.15-0.30 percentage point boost to headline inflation, depending on how the conflict evolves. He added that a sustained oil shock would increase fertilizer and transportation costs, raising the prospect of higher food inflation later in the year.
Forecasts imply that on a 12-month basis core CPI rose 2.5% through February, the same pace as in January and partly reflecting favorable base effects. The Federal Reserve, however, focuses on the Personal Consumption Expenditures price indexes for its 2% inflation objective.
Economists do not expect the anticipated February CPI report to alter near-term monetary policy decisions; the Fed is widely expected to keep interest rates unchanged at its upcoming meeting. Still, some forecasters caution that subdued core CPI readings may not carry over into the PCE measures. January's delayed PCE price index, due on Friday, is expected to show a solid increase in core inflation, and similar dynamics are expected to bias the core PCE price index in February upward when that data are released on April 9.
Lou Crandall, chief economist at Wrightson ICAP, said differences in weighting across indexes and unexpected strength in producer-service inflation could produce a larger increase in the broader consumption measure than implied by headline or core CPI alone. Those weighting and composition effects are the reason some analysts see an upward bias for core PCE in the coming releases.
What to watch when the Labor Department releases the report
- Headline CPI monthly change - consensus around a 0.3% increase.
- Core CPI monthly change - expected to soften to about 0.2%.
- Gasoline and energy components - anticipated contributors to the headline rise.
- Goods categories such as apparel and household furnishings - likely reflecting tariff pass-throughs.
- Food prices - potential upside risk later in the year if oil-driven fertilizer and transport costs remain elevated.
This mix of forces - energy-driven headline volatility, tariff-related goods-price pass-throughs, and offsetting declines in select services and used vehicles - paints a picture of a laborious disinflation path. Analysts expect the Fed to watch the upcoming PCE releases closely, given those indexes are the central bank's preferred gauges for policy calibration.