As the eyes of many are on the Federal Reserve, eagerly looking forward to the first rate cut of 2026, the market has been awaiting the latest inflation data to help fill in some pieces of the puzzle ahead of the next Federal Open Market Committee (FOMC) meeting this month.
While inflation came in largely flat, according to the latest data from the Bureau of Economic Analysis, the whole picture is much more complicated, economists say, as the conflict with Iran still looms over the economy.
The Personal Consumption Expenditures (PCE) price index rose 0.4% in February, a slight rise from the 0.3% observed for January. This sets annual inflation at 2.8%, the same number seen in January, and down slightly from December’s 2.9%.
The PCE price index excluding food and energy—aka core inflation—also saw a 0.4% increase, the same increase it saw in January. Annual core inflation came in at 3%, a slight decrease from the 3.1% seen in January.
Generally, this month’s data “came in as expected,” said Mohamed A. El-Erian—an economist and professor at UPenn’s Wharton School of Business, who formerly chaired President Obama’s Global Development Council—in a post on X.
El-Erian also noted that this month’s data was “sticky above the Federal Reserve’s target, with the goods component flashing yellow.”
Despite not seeing a definite increase in February, Heather Long—chief economist of the Navy Federal Credit Union—noted in a post on X that “even before the war in Iran, the Fed’s favorite inflation gauge was already at 3%—well above the 2% target.”
She also noted that inflation is “likely to go higher this spring,” and will probably “keep the Fed on hold for the foreseeable future.”
In the larger picture, the threat of geopolitical tensions with Iran still leaves a lot of uncertainty brewing for the future of the economy. Notes from the FOMC meeting in March reported significant discussion on the potential impacts of the war.
The minutes indicated that members believed the conflict could also adversely affect the labor market, as businesses could be inclined to pause hiring during uncertain times. If the labor market does take a turn for the worse, voting participants indicated this could incentivize rate cuts. At the same time, members also indicated that if inflation continues to rise, they could be inclined to pursue rate hikes.
