Because of the events in the Persian Gulf, policymakers and the public can effectively ignore the February consumer price index report that was released on Wednesday.
The data, which showed a 2.4% annual increase, was almost entirely collected before the outbreak of the war and does not capture the price increases that have been cascading through the economy since then.
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For this reason, investors should anticipate a monthly increase in top-line inflation of 0.6% in March because of a 0.4% rise caused by oil, gasoline and energy prices and a 0.2% increase excluding those items.
These price increases are expected to be felt in the economy even with the announcement that the International Energy Agency had coordinated the release of 400 million barrels of oil from its member nations’ strategic reserves.
On top of the pricing pressures from the energy shock, another 0.45% increase will eventually show up in the data as distortions caused by the government shutdown last fall are resolved.
The 0.3% monthly and 2.4% annual rise in the CPI for February will quickly turn into a possible top-line increase of 3% in March and 3.5% or greater in April.
Those rising prices will not provide much comfort for a Federal Reserve that will now be focused on short- and medium-term inflation expectations. The Fed will also be on notice for any bleeding through of top-line inflation in the core rate, which excludes food and energy, both in the consumer price index and in the Fed’s preferred inflation gauge, the personal consumption expenditures index.
The January PCE data, to be published on March 13, is expected to show both a top-line and core reading at or above 3%.
The data
Inside the report, inflation increased by 0.3% in the top line and by 0.2% in the core, which translated to a 2.4% rise in the former and 2.5% in the latter from one year ago.
Energy prices jumped by 0.6%, energy commodities by 1.15% and gasoline by 0.8% on the month. All of those categories will soar in March, which we think will raise the top-line rate by 0.6% at a minimum next month.
Services advanced by 0.3% on the month and by 3.1% annually with services ex-energy up by 0.3% and 2.9%, respectively.
Housing advanced at a 0.3% pace on the month and by 3.0% on the year, while shelter and owners’ equivalent rent were up by 0.2% and 3.2%.
Fuels and utilities jumped by 0.5% monthly and by 5.6% annually. Those categories are also likely to have outsized increases in March.
Food and beverage prices increased by 0.4% on the month and by 3% over the past year while food on its own was up by 0.4% and 3.1% over that same period.
One under-examined aspect of the war in Iran and the closure of the Strait of Hormuz will be the price shock to the cost of nitrogen-based fertilizers which will bleed into the cost of food over the next few months.
Transportation and airfare costs will also increase in a painful way in the next couple of months. In February, transportation costs rose by 0.2% and airline fares rose by 1.4%, while the used cars and trucks declined by 0.4% as dealers attempted to clear 2025 models.
Recreation costs were flat, medical costs increased 0.5%, education and communication costs declined 0.2% and commodities prices increased 0.3%.
The takeaway
Investors, policymakers, chief executives and the public should take no solace from the modest top-line increase in the CPI. We anticipate that March data will show a sharp jump because of the energy shock that the economy is absorbing.
Depending on the length of the war and how long the Strait of Hormuz remains closed, businesses will be faced in the near term with decisions about what costs to absorb through thinner margins, what costs to pass along downstream to consumers and how many workers to lay off to bring balance sheets into alignment with inflation.
At the end of the day, duration matters both in terms of the war and how long the Fed will wait to move on to inflation if the rising CPI bleeds into the core.
