U.S. Core CPI Remains Near Five-Year Lows, Making It Difficult to Save the Situation; Under Middle East Turmoil, the Fed's Rate Cut Window May Be Gradually Closing

The Tongtong Finance APP has learned that potential inflation in the U.S. slowed somewhat in February compared to the previous month, providing some relief to price pressures before the outbreak of the Iran war. Data from the U.S. Bureau of Labor Statistics show that core CPI, excluding food and energy, rose 0.2% in January. The year-over-year increase remained steady at 2.5%, the lowest growth rate in nearly five years.

The report indicates that despite rising costs for gasoline and groceries—including fresh vegetables and coffee—declines in used car and auto insurance prices helped curb inflation last month.

After stubbornly persisting for most of last year, inflation has generally been trending downward in recent months. However, renewed inflation concerns triggered by the Iran war (which has already driven up oil, gasoline, and fertilizer costs) may increase Americans’ cost-of-living worries ahead of midterm elections this year.

It is expected that Federal Reserve officials will keep interest rates unchanged at next week’s policy meeting, a forecast made before the latest Middle East events. Due to the war threatening to push inflation higher—at least in the short term—some investors now believe the Fed may hold rates steady for a longer period. However, officials still need to watch the ongoing fragility of the labor market.

Sal Guatieri, senior economist at BMO Capital Markets, said, “At least before this energy price shock, inflation seemed to be stabilizing, and we see some evidence that tariffs’ impact on inflation is now diminishing.”

Following the report, stock index futures declined and Treasury yields rose. Traders still expect the Fed to refrain from cutting rates until the second half of 2026.

Inflation Breakdown

The retreat in core inflation also reflects a moderation in housing costs, one of the largest components of the CPI. The key indicator called “main rent of primary residence” increased by 0.1%, the smallest rise in five years.

Prices for goods excluding food and energy nearly stagnated. However, the report shows that some companies may be trying to pass on tariff-related costs to consumers for items like clothing and appliances.

This month, key household items such as groceries, gasoline, and pipeline natural gas became more expensive. Prices for fresh vegetables, including lettuce and tomatoes, saw their largest increase since 2017, while coffee costs also rose. Egg and butter prices continued to decline.

Although gasoline prices had already been rising before the war began, they surged afterward due to disruptions in global oil supplies caused by the conflict. According to the latest data from AAA, gas prices at the pump increased from $2.98 per gallon before the Iran attack to $3.58.

Including food and energy costs, the overall CPI rose 0.3% in January and increased 2.4% year-over-year.

The cost of living in the U.S. continues to weigh heavily on many Americans, as consumers have faced rising prices for nearly all goods in recent years. Although the Supreme Court abolished most of Trump’s broad tariff policies last month, the government has taken other measures to impose taxes, further clouding inflation prospects.

Beyond the war, strong wholesale inflation also threatens to push up consumer prices. According to the Institute for Supply Management (ISM), producer prices have grown robustly in recent months, with February’s manufacturing input prices rising at the fastest pace since 2022. However, the ISM services PMI showed signs of cooling last month.

A key service sector indicator tracked closely by the Fed (excluding housing and energy costs) increased by 0.4%, slowing from January but remaining at a high level. While Fed officials emphasize the importance of referencing such indicators when assessing inflation trends, they calculate this index based on another independent measure.

This indicator, called the Personal Consumption Expenditures (PCE) Price Index, incorporates CPI data when calculating specific costs. January’s PCE data will be released on Friday. Since housing and medical categories have different weights in different indices, these two indicators may diverge at the start of the year.

Another report from the Bureau of Labor Statistics on Wednesday showed that, after adjusting for inflation, average hourly earnings posted their largest year-over-year increase since May.