ING’s James Knightley says February U.S. inflation was contained ahead of Iran’s military action, with core commodity prices showing circumscribed tariff pass-through. But it warned that rising oil and gasoline costs, as well as pressure on logistics and airline tickets, could push U.S. headline inflation back above 3% in the second quarter and remain high through the end of 2026, delaying a return to 2%.

Energy threats to the inflation path in the US

“February inflation data suggests that price pressures remained well ahead of the military action in Iran. However, amid rising energy costs and concerns about supply bottlenecks in the region, we are likely to see headline inflation return to above 3% in the coming months.”

“While overall the report is quite a good result, reaction has been limited given concerns that developments in the Middle East are likely to drive up inflation over the next few months. Gasoline prices are rising rapidly in response to changes in oil prices, and transportation and logistics costs and airfares are also likely to rise.”

“Given this situation, we suspect that headline inflation in the US will again exceed 3% in the second quarter and may not fall below 3% by the end of the year. This also means that we must acknowledge the risk that 2% inflation will not be achieved until the second half of 2027.”

“That said, the longer energy costs remain high, the greater the risk of energy becoming destructive to demand in an environment where employment and wage growth are slowing rapidly. This could have the effect of weakening underlying inflation pressures over the medium to long term.”

“The Fed is likely to be initially nervous about headline inflation, but if core indicators (excluding food and energy) start to decline, officials will likely feel more comfortable cutting rates several times toward the end of the year.”

(This article was created with the assist of an artificial intelligence tool and has been reviewed by an editor.)