(Yahoo! Finance) - A dated reading on the Federal Reserve’s preferred inflation gauge showed prices remained elevated before the war in Iran broke out, reinforcing that the central bank will remain on hold.
Inflation for the month of February as measured by the Personal Consumption Expenditures Index rose 2.8%. On a “core” basis, excluding volatile food and energy prices, inflation clocked in at 3%. Both were in line with expectations.
PCE on a core basis — what the Fed pays attention to — has been stuck around 3% for three months now. On a 3-month annualized basis, core inflation is now 3.7%, solidly above the Fed’s 2% goal.
“[That] does not paint a flattering portrait of an economy on the edge of war,” said Joseph Brusuelas, principal and chief economist for RSM.
“The increase in the core metric, the best long-run predictor of overall inflation, is far more problematic for central bankers (who) are now six years into a journey well above the Fed’s 2 percent inflation target, whether the ceasefire in the Gulf holds or hostilities resume in the near term.”
Fed officials are highly attuned to the fact that inflation has remained above their 2% goal for five years now, as tariffs continue to push up goods prices and the oil shock bites.
Chicago Fed president Austan Goolsbee said Tuesday he’s concerned that the oil shock comes as tariffs were working their way through the economy and had already led to higher inflation that was expected to fade later this year.
“We’ve got to get our heads around an oil shock, which is going to drive up prices in a stagflationary way, potentially before the other one has gone away,” Goolsbee said.
Goods inflation on a core basis clocked in very strong, jumping 0.84% in the month. Analysts pointed to that as evidence of lagged pass-through of tariffs.
“The hot goods component will reinforce the Fed’s sense that it needs to keep rates on hold until it has seen clear evidence that tariff-driven goods inflation is rolling over before it can even start to weigh the evidence on oil-driven inflation and whether this still permits eventual rate cuts or not,” said Krishna Guha, head of economics and central banking strategy at Evercore ISI.
But that services inflation, which has been running hot and causing concern among many at the Fed, showed improvement in February. That could help soothe Fed officials’ questions about whether underlying inflation is moving back toward their 2% goal once the tariff shock fades.
“The latest release — while only one month — will cause a big sigh of relief,” said Guha. “It goes in the direction of suggesting that tariff inflation is not contaminating services in any serious way, and the disinflation thesis is on track even though the Fed now has to check (that) this remains the case through the oil shock.”
Minutes from the Fed’s policy meeting in March, which are also somewhat outdated, showed that Fed officials expected higher oil prices would increase inflation in the near term and delay prices falling back toward their 2% goal.
Officials noted that a prolonged conflict in the Middle East would likely lead to longer-lasting increases in energy prices and that these would mean higher input costs that would be more likely to be passed through to “core” inflation.
“The vast majority of participants noted that progress toward the Committee’s 2 percent objective could be slower than previously expected and judged that the risk of inflation running persistently above the Committee’s objective had increased,” the minutes read.
This report was originally scheduled for March 27, but was rescheduled due to the October–November 2025 government shutdown.
