ING’s James Knightley says February US inflation was contained before the Iran military action, with core and goods prices showing limited tariff pass-through. However, he warns that rising Oil and gasoline costs, plus logistics and airfare pressures, could push US headline inflation back above 3% in the second quarter and keep it elevated into late 2026, delaying a return to 2%.

Energy-driven risks to US inflation path

"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."

"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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)