U.S. Inflation Holds Near Target as Middle East Conflict Clouds Outlook
U.S. consumer price growth remained relatively moderate in February, although the outlook for inflation has become more uncertain following the joint U.S.-Israel military campaign against Iran, which has caused significant volatility in global oil markets.
Despite concerns surrounding new U.S. tariffs and geopolitical tensions, inflation has continued to show signs of moving closer to the Federal Reserve’s 2% target.
U.S. CPI Matches Market Expectations
Data released by the U.S. Department of Labor showed that consumer prices increased 2.4% year-over-year in February, unchanged from the previous month and in line with economists’ forecasts.
On a monthly basis, the Consumer Price Index (CPI) rose 0.3%, slightly higher than the 0.2% increase recorded in January, also matching market expectations. The rise was largely driven by higher energy and food prices.
Core Inflation Remains Stable
When excluding volatile categories such as food and fuel, core inflation reached 2.5% year-over-year, unchanged from January and consistent with analyst projections.
Certain components, including airfares and home-related goods like window and floor coverings, became more expensive. However, these increases were partly offset by falling prices in categories affected by tariffs, such as toys and footwear.
The core CPI rose 0.2% month-over-month, slightly lower than January’s 0.3% increase, again meeting market expectations.
Oil Market Volatility Raises New Inflation Risks
Importantly, the February inflation data does not yet reflect the impact of the Iran conflict, which escalated following U.S. and Israeli strikes on Tehran late in the month.
The conflict has disrupted shipping in the Strait of Hormuz, a key passage through which around 20% of global oil supply normally flows. As a result, tanker traffic through the region has slowed dramatically.
Concerns about prolonged supply disruptions have triggered sharp swings in global oil prices.
Brent Oil Prices Spike
Brent crude oil futures were recently trading near $92 per barrel, after briefly surging close to $120 earlier in the week. Rising fuel costs have already pushed U.S. gasoline prices higher, increasing fuel expenses for drivers by roughly 20%.
Higher energy costs are a major factor in overall inflation, raising concerns that price pressures could reaccelerate if the conflict continues.
Federal Reserve Policy in Focus
Investors are increasingly worried that sustained increases in oil prices could force the Federal Reserve to reconsider its monetary policy stance.
However, markets currently expect the central bank to keep interest rates unchanged at 3.5%–3.75% during its upcoming policy meeting, according to data from CME Group’s FedWatch tool.
Key Inflation Data Still Ahead
Later this week, investors will also receive the core Personal Consumption Expenditures (PCE) price index, another important measure of inflation closely monitored by the Federal Reserve.
Economists expect core PCE inflation to rise 3.1% annually and 0.4% month-over-month. This indicator typically attracts significant attention because it is considered the Fed’s preferred inflation gauge.
Strategic Oil Release Under Consideration
In response to the surge in oil prices, the International Energy Agency (IEA) is reportedly considering the largest coordinated release of strategic oil reserves in history, according to reports from the Wall Street Journal.
The proposed release would exceed the 182 million barrels of oil released by IEA member countries following the Russian invasion of Ukraine.
Geopolitical Tensions Continue
Meanwhile, Donald Trump has warned that the United States could increase military pressure on Iran, following reports that Tehran has deployed naval mines in the Strait of Hormuz.
At the same time, the timeline for the conflict remains uncertain. Trump recently suggested the war could end “very soon,” but military exchanges between Iran, the United States, and Israel have continued across the region.
Iran has also warned that escalating tensions could push oil prices as high as $200 per barrel, linking energy markets directly to the region’s security situation.
Analysts note that while diplomatic solutions may eventually emerge, multiple geopolitical actors remain involved in the conflict, making the future trajectory of the crisis difficult to predict.
