The core CPI in the United States has remained at a low level for nearly five years, making it difficult to come to the rescue. With the chaos in the Middle East, the possibility of a rate cut by the Federal Reserve may be gradually becoming more distant.

The potential inflation in the United States in February slowed compared to the previous month, bringing some relief to price pressures before the outbreak of the Iran war. Data from the U.S. Labor Statistics Bureau shows that the core CPI, excluding food and energy, rose by 0.2% in February compared to January. The year-on-year increase remained at 2.5%, the slowest growth rate in nearly five years. The report shows that despite the rising costs of gasoline and groceries including fresh vegetables and coffee, the decrease in prices of used cars and motor vehicle insurance helped to suppress inflation last month. After showing stubborn performance for most of last year, inflation has been generally decreasing in recent months. However, worries about a new round of inflation triggered by the Iran war (which has already raised the costs of oil, gasoline, and fertilizers) may exacerbate the anxieties of Americans about the cost of living before the midterm elections later this year. It is expected that Federal Reserve officials will keep interest rates unchanged at next week's policy meeting, a prediction made before the latest events in the Middle East. Due to the threat of inflation from the war - at least in the short term - some investors now believe that the Fed may keep interest rates unchanged for a longer period of time. However, officials still need to be aware of the ongoing fragility in the labor market. Montreal Bank's senior economist Sal Guatieri said, "At least before this energy price shock hits, inflation does seem to be stabilizing, and we see some evidence that the impact of tariffs on inflation is now fading." After the report was released, stock index futures declined and bond yields rose. Traders still expect the Fed to cut interest rates again until the second half of 2026. Inflation details The decline in core inflation also reflects the moderate increase in housing costs, which is one of the largest components of the CPI. An important indicator known as "primary housing rent" rose by 0.1%, the smallest increase in five years. Commodity prices excluding food and energy hardly increased. However, the report shows that for certain goods such as clothing and household appliances, companies may try to pass on tariff-related costs to consumers. Key household items such as groceries, gasoline, and natural gas in pipelines became more expensive. Prices of fresh vegetables including lettuce and tomatoes saw their largest increase since 2017, while the cost of coffee also increased. Egg and butter prices continued to decline. Although gasoline prices were already rising before the war started, since then, the conflict has disrupted global oil supplies, causing gasoline prices to surge. According to the latest data from the American Automobile Association (AAA), gas prices at the pump have risen from $2.98 per gallon before the attack on Iran to $3.58. Including food and energy costs, overall CPI increased by 0.3% in February compared to January, and by 2.4% year-on-year. The cost of living in the United States continues to put pressure on many Americans, as consumers have faced rising prices for almost all goods in recent years. Although the Supreme Court overturned most of former President Trump's broad tariff policies last month, the government has taken action to tax through other channels, further clouding the outlook for inflation. In addition to war, strong inflation at the wholesale level also threatens to push up consumer prices. According to data from the Institute for Supply Management (ISM), the Producer Price Index has shown strong growth in recent months, with manufacturers' input prices rising at the fastest rate since 2022 in February. However, the ISM's services provider price index cooled off last month. A service sector indicator closely monitored by the Federal Reserve (excluding housing and energy costs) rose by 0.4% in February, slowing down compared to January but still at a high level. While central bank officials emphasize the importance of such indicators when assessing the trajectory of inflation, they calculate this index based on another independent index. This indicator, known as the Personal Consumption Expenditures (PCE) price index, references CPI data when calculating specific costs. PCE data for January will be released on Friday. Due to differences in weighting for categories such as housing and healthcare in different indexes, these two indicators may show divergence at the beginning of the year. Another report from the Labor Statistics Bureau on Wednesday showed that average hourly wages, adjusted for inflation, saw the largest year-on-year increase since May.