Consumer Price Index February 2026

A benign inflation ahead of the oil price shock

Headline Consumer Price Index (CPI) rose a moderate 0.3% month over month (m/m) in February, keeping inflation unchanged at 2.4% year over year (y/y). Core CPI advanced a subdued 0.2%, leaving core inflation steady at 2.5% y/y.

Energy prices rose 0.6%, driven by gasoline (up 0.8%) and utility gas prices (up 3.0%) on particular cold temperatures. Food prices rose 0.4% in February, with moderate increases across groceries and restaurants. Core CPI rose a modest 0.2% despite ongoing notable pressure for airfare, up 1.4% m/m following a 3.8% m/m and 6.5% m/m increase in the prior two months. Medical care services also rose sharply, up 0.6% in February. Adding to the pressures were hotel prices (up 1.1%), apparel prices (up 1.3% on greater tariff pass-through), recreational goods (up 0.4% in part due to a sharp rise in computer software prices), and home furniture and furnishing prices. 

The main disinflationary elements in this report were lower used car prices, posting their third consecutive monthly decline (down 0.4%), new car prices that were flat, auto insurance prices (down 0.3%), and shelter costs only rising 0.2%. The rent component of shelter cost posted its lowest monthly gain since January 2021, up only 0.1%, while the owners’ equivalent rent (OER) component was tied for its lowest post-pandemic gain of 0.2%. Disinflationary pressures on the housing front are continuing to build with shelter cost inflation at 3.0% y/y – about 0.5 percentage point (ppt) below its pre-pandemic range. Rent inflation, in particular, has slowed to 2.7% y/y, which is about 1ppt below its pre-pandemic range, while OER inflation has cooled to 3.2%, which is in line with its pre-pandemic range. 

In normal times, these prints would be benign — “Nothing to see here, please move along.” But these are far from normal times, and the data must be interpreted through the lens of distortions from the government shutdown, unprecedented trade policy volatility and record swings in energy prices tied to the conflict in the Middle East. The first is causing CPI inflation to be understated by roughly 0.3ppt–0.4ppt. The second is producing a gradual and uneven pass-through of tariffs to consumers. The third has triggered an immediate spike in prices at the pump with more inflation pressure in the pipeline.

We had initially estimated that the 2025 tariff shock would generate a cumulative inflation boost of about 1ppt, and roughly two-thirds of that shock has now materialized. Absent the downward bias in the CPI due to the U.S. Bureau of Labor Statistics’ methodology for filling gaps during the October government shutdown, CPI inflation would likely be running closer to 2.8%. Excluding the tariff effect, inflation would be nearer to 2.2%.

The Supreme Court ruling that the International Emergency Economic Powers Act cannot be used to impose tariffs caused the US average tariff rate to collapse from 16% to around 9%. In isolation, this could have been a meaningful disinflationary impulse. But we are skeptical that such an effect will materialize. The administration’s immediate 10% global tariff under Section 122 of the Trade Act of 1974 pushed the rate back to 12%, and firms that have been hypersensitive about cost pass-through are unlikely to lower prices now. Instead, they may attempt to reverse earlier margin compression. The possibility that the Section 122 tariff could be raised to 15% only raises this likelihood.

Middle East tensions add another dark cloud to the inflation outlook. Crude oil price swings — briefly topping $115 per barrel on March 9 — have almost instantly passed through to prices at the pump. While no one knows how long the conflict will last — and crude prices have already fallen back and could further decline if hostilities ease and maritime flows through the Strait of Hormuz normalize — the CPI will mechanically capture the March spike in energy prices. We estimate headline CPI will rise 0.9% m/m in March, with gasoline prices up roughly 15%, pushing headline CPI inflation toward 3.3%. Core inflation should remain largely unaffected aside from marginally higher transportation costs, provided the crude price jump proves transitory.

So what’s the Fed going to do? Probably not much. Before the Middle East conflict, most Fed officials argued policy was well positioned — close to neutral — to wait for clearer evidence of inflation moving sustainably toward 2% before easing further. Chicago Fed President Austan Goolsbee resurfaced the scars of 2021, warning that policymakers “have been burned before by assuming transitory inflation.” That captures the prevailing sentiment: Few officials want to risk making policy too accommodative in an environment defined by persistent supply shocks.

Even Governor Christopher Waller — who dissented in January in favor of a cut — signaled a couple of weeks before the February employment report that if the labor market remained firm, he was “50–50” on whether to dissent again at the March meeting. The weak February jobs report likely nudges him toward another dissent, but the episode highlights how close even the more dovish voices were to backing a hold. Add an oil shock, and the Committee’s hawkish tilt will only intensify.

This brings us to the March Federal Open Market Committee (FOMC) meeting. What should we expect? The FOMC will hold the federal funds rate steady, and Stephen Miran, Waller and perhaps Michelle Bowman will likely dissent — emphasizing downside risks to growth from labor market softening and the view that the oil shock poses more risk to employment than a (transitory) risk to inflation. Most others, including Fed Chair Jerome Powell, will favor caution and patience, arguing that policy is not overly restrictive and that the statement may even include a two‑sided risk balance, leaving the door open to rate hikes should inflation or expectations show signs of structural firming.

Our baseline assumes a transitory energy‑driven bump that lifts CPI inflation to 3.3% in the spring. We continue to expect a further cooling in labor market momentum with upward pressure on the unemployment rate. With CPI inflation still expected to ease toward 2.5% in the second half of the year, the window for further rate cuts will remain open. But, in an environment where inflation runs above 2% for an extended period, it is entirely plausible that the Fed delivers no rate cuts in 2026.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.