February’s inflation numbers showed prices were climbing steadily even before the Iran conflict pushed energy costs higher. The personal consumption expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge, revealed that core inflation was stubbornly above target heading into the crisis.
Rising Inflation Before the Conflict
In February, the PCE price index, which excludes volatile food and energy costs, rose 0.4% from January. On an annual basis, core inflation stood at 3.0%, just slightly down from January’s 3.1%. Meanwhile, the headline inflation rate, which includes all categories, held steady at 2.8% year-over-year. These figures came before the war between the U.S. And Iran sparked a sharp jump in oil prices.
These monthly increases might look small, but if they continued all year, inflation would rise well above the Fed’s 2% target. The numbers show that inflation was already firming even before geopolitical tensions pushed energy prices higher.
Consumer spending barely moved in February. After adjusting for inflation, spending increased just 0.1%, while personal incomes dipped 0.1%—the first drop since October. This squeeze on purchasing power suggests Americans were starting to feel the pinch before the Iran war made things worse.
Energy Prices Set to Fuel Inflation Spike
The war that started in March caused oil prices to jump, pushing gas prices up by more than $1 per gallon in some places. At one point, crude oil prices topped $100 a barrel.
This rapid rise in energy costs will probably push headline inflation back up sharply in March and April.
Analysts forecast that the Consumer Price Index (CPI) for March could show prices climbing at an annual rate of 3.3%, the highest since May 2024. Oxford Economics predicts headline inflation will exceed 4% by April due to the lingering effects of the conflict on energy supplies.
Higher fuel costs don’t just affect drivers at the pump. They tend to ripple through the economy, driving up prices for goods that rely on transportation and energy-intensive production. Grocery bills, airline tickets, and other everyday expenses could all see noticeable increases.
Fed’s Challenge: Sticky Core Inflation and Economic Growth
The Federal Reserve watches the core PCE index closely since it excludes food and energy, which can be volatile. That measure is considered a better indicator of long-term inflation trends. The fact that core inflation held at 3% before the Iran conflict suggests inflation pressures were already persistent.
At the same time, economic growth signals were weak. The fourth quarter of 2025 saw GDP growth revised down to 0.5% annualized, from previous estimates of 0.7% and 1.4%. A key demand metric, real final sales to private domestic purchasers, slowed to a 1.8% growth rate, down 0.6 percentage points from early estimates.
These figures point to a fragile economy grappling with slowing growth and sticky inflation—a situation sometimes compared to the difficult economic conditions of the 1970s. The term "stagflation" has even been mentioned by market strategists assessing the combination of weak growth and stubborn inflation.
Impact on Consumers and the Outlook
Americans have already paid an extra $8.4 billion in fuel costs since the Iran war began, according to estimates from the Joint Economic Committee’s Democratic minority. That, combined with rising prices for other goods and services, is squeezing household budgets.
There’s concern that as prices climb, consumers might cut back on discretionary spending, which could slow the economy further. The Federal Reserve is watching these developments closely. Fed officials have shown caution about adjusting interest rates, balancing their goals of controlling inflation and supporting employment.
Even with a tentative ceasefire announced, energy prices remain elevated—about 43% higher than before the conflict started. After a crisis, prices tend to drop slower than they rise, which economists call the "rockets and feathers" effect.
That means Americans could be facing higher costs for months, with little immediate relief in sight. Economists warn that the inflation fight might be set back significantly, undoing some of the progress made earlier this year when inflation cooled from its peak levels.
Related Articles
February’s inflation data shows prices were climbing steadily even before the Iran war pushed energy costs higher. As the conflict’s impact continues to ripple through the economy, the Federal Reserve faces a tougher challenge in reining in inflation without derailing growth.
This article was created with AI assistance.
