Takeaway: The February CPI report showed inflation cooling, as expected. But the report will largely be ignored by markets because the data predates the war in Iran.
February’s inflation data paint a fairly mild picture, but forward-looking investors and policymakers won’t be paying much attention to it.
- Headline inflation, which includes all categories, increased 0.3% monthly and 2.4% annually in February while core inflation, which excludes food and energy prices, increased 0.2% monthly and 2.5% annually. These came in almost exactly as expected.
- Shelter inflation, the largest category in the CPI basket, continues to cool as expected, with rent of primary residence coming in at 0.1% monthly and owners’ equivalent rent at 0.2%.
The focus is on what’s ahead. Recent oil price spikes will hit the March data, and the distortions caused by the government shutdown will fully unwind in April.
- February’s 2.4% annual headline inflation could increase to 3% in March with oil price increases quickly translating into gas prices spikes.
- In April, the downward bias in annual inflation that’s been affecting the CPI data since the October government shutdown will fully reverse. That means even higher annual inflation numbers in April.
- Today’s rates already incorporate these effects as investors are well aware of what’s coming.
The current movement in oil prices is unlikely to impace the Fed’s path to a couple of rate cuts in the back half of 2026.
- Oil price increases hit the gas pump almost immediately, and impact headline inflation significantly. While the Fed’s mandate is written relative to headline inflation, in practice, they anchor to “underlying inflation”, which they measure as core inflation. The Fed ignores food and energy prices because those are volatile and less responsive to monetary policy. Historically, oil price spikes have a muted effect on core inflation. Some estimates suggest less than one-tenth the size of the effect on headline inflation.
- Large sustained increases in energy prices will hit economic growth and unemployment as consumers spend less elsewhere. That implies the Fed may even need to cut rates more–but that would only come in the long run because those effects take time to manifest in economic data.
