Key inflation gauge remains elevated in February before Iran war

Excluding the volatile food and energy categories, core inflation also rose 0.4% in February from January, and it was 3% higher than a year earlier. The annual figure is slightly below January's reading of 3.1%.

Still, the monthly increases are at a pace that if continued for a whole year, would easily top the Fed's 2% inflation target.

“Consumer inflation was firming even prior to the outbreak of war in the Middle East, and it is primed to jump sharply higher in March,” Kathy Bostjancic, chief economist at Nationwide, wrote in a client note. “Even if a long-lasting deal to end the war is reached and the Strait of Hormuz is fully reopened, it would take months for oil, gasoline, diesel and other commodity supplies to snap back to prewar levels and thus for prices to settle back to preconflict levels.”

Thursday's report is largely a warm-up for the more important inflation data to be released Friday, when the government will publish the higher-profile consumer price index for March. The Friday report will be the first to reflect the impact of the gas price spike from the Iran war. Economists forecast it will show a big increase of 0.9% just in March from February, and a 3.4% gain from a year earlier. The annual figure would be a big increase from 2.4% in February.

The large jump in inflation in March will heighten concerns at the Fed that prices are moving further away from their inflation target and make it much less likely the central bank will cut rates anytime soon. At their most recent meeting last month, some Fed officials supported opening the door to the potential for rate hikes if inflation didn't show signs of improving.

Thursday's report from the Commerce Department also showed that Americans' incomes slipped 0.1% in February, the first decline since October, while spending after adjusting for inflation barely increased.

Higher inflation is sapping Americans' purchasing power. Spending rose a solid 0.5% in February from the previous month before adjusting for higher prices. Bostjancic expects consumer spending, adjusted for inflation, will rise a modest 1.2% at an annual rate in the first three months of this year, below the 1.9% reached in last year's fourth quarter.

The economy may still grow a decent 2% in the first quarter, Bostjancic said, driven by investments in artificial intelligence and a bounceback in government spending after last year's shutdown. The government said Thursday growth was just 0.5% at the end of last year.