Inflation stuck at 3% as Fed gauge shows snapshot before Iran war

A key inflation measure favored by the Federal Reserve showed core prices running around 3% year-on-year in February, indicating that price pressures were already elevated before the U.S.-Iran conflict pushed energy costs higher. The report covers a period preceding the major oil-price shock tied to the war.

Detailing the numbers, the PCE price index rose 0.4% in February from January, while core PCE (excluding food and energy) also climbed 0.4% month-on-month and stood 3.0% higher versus a year earlier. Headline PCE was up 2.8% year-on-year. The data release was delayed by a backlog of government reports, so it does not yet reflect the full impact of the March spike in fuel prices.

Markets reacted to the dual signal of stubborn underlying inflation and rising energy risk. The Fed kept policy rates unchanged at its March meeting, emphasizing uncertainty about the economic outlook as the Iran war elevated upside risks to inflation; higher gasoline and crude prices are expected to feed through to consumer prices in the near term. Such energy-driven inflationary pressure narrows the central bank’s room to ease monetary policy.

In a broader context, disruptions to shipping routes and tensions around the Strait of Hormuz have tightened physical oil markets and pushed benchmarks substantially higher since the conflict began. Analysts warned that the March consumer price report — the first to include the immediate effect of the oil shock — could show a sharp month-on-month increase, complicating the Fed’s path back to its 2% inflation objective.

Fed minutes and market commentary indicate officials are split between caution and readiness to act if inflation proves persistent; some policymakers signaled that further tightening could be appropriate if price pressures do not abate. Investors will monitor incoming CPI and PCE prints and oil price developments closely, with the likely outcome that any sustained energy-driven rise in inflation would delay rate cuts and could even prompt reconsideration of policy direction.