Inflation held steady in February — but the latest reading offers little clarity for Federal Reserve officials, who are navigating an increasingly complicated economic landscape.
Consumer prices rose 2.4% from a year earlier, according to new government data released Wednesday, a figure that suggests inflation has been gradually cooling toward the Fed’s 2% target.
But now, a sudden surge in oil prices tied to the war in Iran threatens to undo that progress and could keep the central bank in a holding pattern when it comes to interest rates. The Fed’s policy-setting committee will make its next interest rate decision in a week.
“Due to the events in the Persian Gulf policymakers and the public can effectively ignore the February U.S. Consumer Price Index,” wrote Joe Brusuelas, chief economist at RSM. He expected headline inflation could climb back toward 3% in March and 3.5% “or greater” in April, as higher energy prices begin filtering into the data.
“That will not provide much comfort to an American central bank that will now be focused like a laser beam on short- and medium-term inflation expectations,” Brusuelas wrote.
The national average price for gasoline, which contributes to headline inflation, reached $3.58 a gallon on Wednesday, according to AAA, up $0.64 over the past month. It’s the highest level since May 2024. Meanwhile, U.S. crude oil prices, a key component of gas, remain volatile after surging earlier in the week. Even after pulling back from those highs, prices are still up roughly 30% from before the conflict began just over two weeks ago.
The spike is due to an effective shutdown of the Strait of Hormuz, a narrow waterway on the southwestern tip of Iran through which tankers transit carrying roughly one-fifth of the world’s oil supply.
On Wednesday, the 32 countries that comprise the International Energy Agency unanimously agreed to release 400 million barrels of oil from their reserves in a bid to shore up supply around the world and head off further price increases.
But inflation is not the only concern for Fed policymakers. The U.S. labor market is also weakening.
New data from the Bureau of Labor Statistics released Friday showed the U.S. economy lost 92,000 jobs last month, while revisions to December and January revealed 69,000 fewer jobs than originally estimated.
“This labor market weakness comes alongside a movement toward greater labor-minimizing and cost-reducing productivity enhancements from many technological advances, but we still have yet to see the real impact of AI-related substitution in the labor market,” Rick Rieder, chief investment officer of global fixed income at BlackRock, wrote in a note to clients on Wednesday.
“That places the Fed in a challenging position, as the central bank will have to consider greater policy accommodation should the labor market weaken materially further, but in the midst of an oil price shock the timing of such moves is highly uncertain.”
Typically, signs of a softening labor market would push the Federal Reserve to consider cutting interest rates to achieve maximum, sustained employment — one half of the central bank’s dual mandate, which also includes maintaining stable prices and keeping inflation near its 2% target.
But the war in Iran is complicating that calculus, as inflation worries persist and leave policymakers to balance competing risks.
And that’s not all. Economists are also beginning to flag concerns over consumer spending, which was expected to see a significant boost from new tax rules included in President Donald Trump’s “One Big Beautiful Bill.”
But so far, expectations are not matching reality.
Citi noted that about halfway into tax season, individual federal refunds are tracking about $30 billion higher than they were last year, well below some estimates that had projected a boost to U.S. households of as much as $100 billion.
A smaller-than-expected fiscal tailwind could weigh on spending in the months ahead, and ultimately drag on economic growth.
“Consumer spending is likely to slow this year with less fiscal boost than consensus expected and approximately zero net job growth,” Citi economists wrote.
For the Fed, the danger is a familiar but unwelcome scenario: higher prices paired with slowing growth — a dynamic known as “stagflation” — that could make it harder for the central bank to cut interest rates and ease pressure on American consumers.
Adding yet another layer of uncertainty is the shifting outlook for tariffs.
Last month, the Supreme Court struck down many of President Donald Trump’s tariffs, ruling them unconstitutional. Trump has since replaced some of those tariffs with a global 10% duty, but it remains unclear how the new duties will affect prices or whether refunds will be issued for tariffs already collected.
According to the Penn Wharton Budget Model, up to $175 billion in tariff refunds is at stake.
“Until the Strait of Hormuz is opened and the turmoil in the Middle East simmers down, the Federal Reserve may step away from any action on interest rates,” wrote Skyler Weinand, chief investment officer at Dallas-based investment advisory firm Regan Capital.
He added, “The Fed now has tariffs, potential tariff refunds, higher energy prices and weakening employment to sort through in order to get any kind of clarity on what to do next.”
Until then, it’s wait until the fog clears and then see mode, once again.
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