KANSAS CITY (AP) — Inflation stayed stubbornly elevated last month as gas prices rose in a snapshot of what consumer prices looked like before the U.S.-Israeli attack on Iran sent energy costs soaring.
Consumer prices rose 2.4% in February compared with a year earlier, the Labor Department said Wednesday, matching January’s increase. Excluding the volatile food and energy categories, core prices climbed 2.5% from a year ago, also matching January’s level, which was the lowest in five years. Both figures are above the Federal Reserve's 2% target.
Wednesday’s data has been overtaken by the conflict that began when the U.S. and Israel attacked Iran on Feb. 28, which has caused wild gyrations in oil prices as shipping lanes through the Persian Gulf have suffered a rare shutdown. Gas prices have already jumped and are expected to push inflation much higher. Inflation data for this month will be released in early April.
The price spike will challenge the inflation-fighters at the Federal Reserve and could slow consumer spending, which drives two-thirds of the nation’s economic growth. The increase could reverse if the war ends soon, as President Donald Trump has hinted. But the spike in gas prices threatens to worsen inflation for at least a few months with Americans already worn down by nearly five years of stubbornly high prices. “Affordability” has become a thorny political issue for congressional Republicans with midterm elections later this year.
On a monthly basis, prices rose 0.3% in February from the previous month, up from 0.2% in January. Increases at that pace for an extended period would push yearly inflation higher. Core prices moved up just 0.2%, down from a 0.3% rise in January.
There were some positive signs in Wednesday's report, with rental inflation falling to just 0.1% on a monthly basis, the smallest increase in five years. New car prices were unchanged in February and used car prices fell 0.4%.
But grocery prices rose more quickly last month than in January, continuing a trend that has hammered family budgets. They rose 0.4% in February and were up 2.4% from a year earlier. Gas prices increased 0.8% last month, though were down 5.6% compared with a year ago. And clothing costs jumped 1.3% just in February, likely reflecting the impact of tariffs.
Oil prices soared as high as nearly $120 a barrel late Sunday before falling closer to $87 by Wednesday after Trump suggested that the conflict would be a “short-term excursion.” Still, he has also threatened more attacks and there is no sign of a let-up.
How long oil prices remain elevated and how much they filter into other costs are key questions for where inflation heads in the coming months.
Companies bracing for higher energy costs are already wresting with tariffs, inflation, and bigger labor costs. Many are still avoiding price hikes for customers, but in many cases that will depend on the duration of the war.
Isaac Lee Collins, CEO of Fifth & Emery Frozen Yogurt & Chocolate in Kansas City, said rising gas prices will make doing business more expensive.
The chocolate he imports from France got 15% to 20% more expensive last year, mostly because of tariffs.
“It’s just another surcharge that we’re going to get hit with,” Collins said.
Stew Leonard Jr., CEO of the Stew Leonard’s supermarket chain, fears his suppliers will start increasing prices as gasoline prices spike. He receives truck loads of meats and fresh produce daily.
“He’s a regular guy that has a family, and if it’s costing him more money to put fuel in this truck, he’s going to knock on my door and say ’Hey, Stew. I need a little more for that,” he said.
If the costs of doing business increase at Stew Leonard's, there may be price hikes on some goods, he said.
Some analysts warn prices will move much higher if the Strait of Hormuz remains closed. About 20% of the world’s oil and natural gas is shipped through the narrow channel every day. On Wednesday, a projectile hit a Thai cargo ship off the coast of Oman that leads to the Strait of Hormuz, setting it ablaze.
Oil prices could soar to $150 a barrel in the coming weeks if shipments don’t resume, according to Wood Mackenzie, an energy analytics firm.
That would push gas prices still higher in the United States, where they jumped to $3.58 a gallon on average nationwide Wednesday, according to AAA, an increase of about 20% just in one month.
Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, a consulting firm, expects inflation could jump by as much as 0.9% in March from the previous month. It would be the largest monthly gain in nearly four years. Yearly inflation could easily surpass 3% in that case, and potentially near 4% in the following months.
The jump in gas prices so far this month has been the largest since March 2022, and before that since June 2009, Rosner-Warburton said.
“That is enormous,” she said. “Increases of that magnitude are highly unusual.”
Core prices will be much less affected this month, but could tick higher over time as more expensive gas pushes up airline fares, shipping, and other transportation costs.
Even if price increases are short-lived, it will almost certainly delay any interest-rate cut by the Federal Reserve, which meets next week. It cut its key rate three times last year before leaving it unchanged at its last meeting in January.
The Fed is already deeply divided over whether it needs to keep its rate at its current level of about 3.6% to push inflation down closer to its 2% goal, or whether it should reduce the rate to support borrowing, spending, and hiring.
Last Friday, the government reported unexpectedly sharp job losses for February as employers slashed 92,000 jobs. The unemployment rate ticked up to 4.4%.
The weak jobs report puts the Fed in an especially difficult position: It would normally reduce rates to boost growth and hiring, but it typically raises rates — or at least keeps them where they are — if inflation is a concern.
“That's always the worst-case scenario for the central bank,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago, on Bloomberg Friday. "As we get more uncertainties, I kind of think that the time at which it makes sense to act keeps getting pushed back.”