Iran rejects U.S. war proposal, says no talks before conditions met
The February inflation data suggests that price pressures were in an OK place ahead of the military action in Iran. But with energy costs on the rise and concerns about supply bottlenecks in the region, we are likely to see a return of 3%+ headline inflation in coming months.
Tariff Impact Remains Limited on Prices
US February consumer price inflation was broadly in line with expectations. Headline prices rose 0.3% month-on-month/2.5% year-on-year while core inflation (excluding food and energy) was only 0.2%/2.4%, suggesting inflation pressures were well-behaved ahead of the military action in Iran. Used vehicle prices fell 0.4% MoM, new vehicle prices were flat, education and communication prices fell 0.2% and housing costs rose only 0.2%, which helped to offset larger increases for appliances (+3.1% MoM) apparel (+1.3%), medical care services (+0.6%) and airline fares (+1.3%).
The chart below shows that sectors vulnerable to the effects of tariffs – goods prices ex food and energy – remain remarkably benign. That is mainly down to weakness in auto prices, but even if we strip out autos, core goods rose only 0.2% MoM. Appliances did catch the eye with their 3.1% MoM increase, following a 1.3% gain in January, but this followed 1.1% and 2.6% monthly drops in November and December so it is difficult to argue tariffs are having a major impact on prices.
All we can say is that with import prices continuing to rise and consumer prices looking benign, the extra $20-$25bn of tariff costs per month are being borne by corporate America. Productivity gains are often cited as a factor limiting the inflation effect, but we note that imports are rising quickly again now that all the pre-tariff inventory build from late 2024/early 2025 has been exhausted. That suggests more tariff costs to come. As such, we can’t exclude the possibility that tariffs will eventually have a more noticeable impact on prices.
Source: Macrobond, ING
Energy Costs Point to a Return of 3%+ Inflation
While on balance the report is a pretty good outcome, reaction has been limited given concerns about how developments in the Middle East are likely to mean inflation moves higher in the next few months. Gasoline prices are rising rapidly in response to oil price moves and transport and logistics costs and airline fares are also likely to move upwards. Given this situation, we suspect that US headline inflation will move back above 3% during the second quarter and may not drop below 3% until the end of the year. It also means we must acknowledge the risk that 2% inflation isn’t achieved until the second half of 2027. That said, the longer energy costs stay elevated, the greater the risk that it becomes demand destructive in an environment where employment and wage growth are stalling fast. This could end up dampening core inflation pressures over the medium to longer term.
The Fed will likely be nervous about headline inflation initially, but if the core metrics (excluding food and energy) start to cool, officials will likely become more comfortable cutting interest rates a couple of times late in the year.
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