Four-year high! U.S. February import prices surge, is inflation countdown underway?

Will the surge in import prices due to AI impact change the Federal Reserve’s rate cut path?

Data released on Wednesday showed that U.S. import prices in February experienced their largest increase since 2022. Wall Street was already concerned about a new wave of inflation triggered by the Iran conflict, and now with import prices rising early, this has further intensified those worries. The pricing in the U.S. money market indicates that the probability of rate cuts this year has fallen below 10%.

Multiple Factors Driving Prices Higher

The U.S. Bureau of Labor Statistics announced on Wednesday that import prices rose 1.3% month-over-month in February, the largest increase since March 2022, with January’s increase revised up to 0.6%. Year-over-year, import prices increased 1.3%, the largest since February 2025, with January’s YoY increase at 0.3%.

Pressure from geopolitical conflicts combined with import tariffs is gradually passing costs onto consumers. Fuel import prices rebounded 3.8% in February, the largest since April 2024, with both oil and natural gas prices rising. Driven by increases in vegetables, distilled spirits, meats, and oilseeds, food import prices rose 0.8% month-over-month.

Excluding fuel and food, core import prices surged 1.2% MoM, up from 0.7% in January. Year-over-year, core import prices soared 3.0%, partly due to the dollar weakening against major trading partner currencies earlier. From early 2026 until late February, the dollar trade-weighted index fell 1.6%, and for the full year 2025, it declined 7.37%.

Driven by rising costs for clothing, footwear, and household goods, non-auto consumer goods import prices increased 0.5%, while auto, parts, and engine import prices rose 0.2%. Economists suggest that last year, importers may have deliberately kept prices low to maintain market share in the U.S.

Nationwide Financial Market Economist Oren Kratchkin said, “The recent strengthening of the dollar will take time to ease inflationary pressures, and the previous depreciation is still contributing to higher import prices.”

Capital goods import prices rose 1.3% MoM, the largest increase since the U.S. began tracking this monthly data in 1988, mainly driven by higher prices for computers, peripherals, semiconductors, and industrial and service machinery, likely related to the recent surge in corporate AI spending.

The Outlook for Rate Cuts Looks Duller

Various signs indicate that even before the U.S.-Iran conflict escalated, inflation was already showing signs of strengthening. Last week, U.S. government data showed that producer prices (PPI) in February increased by the most in seven months, driven by widespread rises in service and goods prices. This week, S&P Global’s March U.S. Manufacturing PMI indicated that companies faced higher production costs and raised prices for goods and services, citing soaring energy prices and supply chain disruptions.

This could lead the Fed to keep interest rates steady for a period. In response to the rapidly evolving Middle East situation, Fed officials have forecast only one rate cut this year, while financial markets see the probability of rate cuts decreasing.

A First Financial journalist summarized that institutions believe U.S. inflation will rise sharply after March, with the extent depending on how long the conflict lasts. Since the conflict began, oil prices have increased over 30%. Fertilizer prices have also risen, further transmitting inflation to food prices. The combined pressures from war and import tariffs are causing companies to pass costs onto consumers.

Eugene Alerman, Chief Economist at Raymond James, said, “The significant increase in non-energy import prices is a warning to policymakers and will likely prolong the Fed’s pause on rate hikes beyond expectations.”

Grace Zwemer, U.S. economist at Oxford Economics, told First Financial that “factors such as rising global oil prices driven by the U.S.-Iran conflict, strong demand for capital goods imports, and the previous dollar depreciation pose upside risks to import prices in 2026.”

Based on import, producer, and consumer price data, Wall Street’s consensus on the core Personal Consumption Expenditures (PCE) index— the Fed’s preferred inflation measure— is that it will rise 0.4% MoM in February, with a 3.0% YoY increase. In January, core PCE rose 0.4% MoM and 3.1% YoY. The U.S. government will release the delayed February PCE inflation report next month.

Federal funds futures prices show a 7% chance of rate cuts this year and a 20% chance of rate hikes. JPMorgan economist Abir Reinehart said, “Before this round of Middle East conflict began, the Fed was already facing stubborn core PCE inflation. As long as the labor market remains stable, this factor will keep the Fed cautious about rate cuts.”