March CPI Rise Unavoidable Due to Iran War... Will Path of Rate Cuts Be Adjusted? (Comprehensive)

Gasoline Prices Fall in February, While Natural Gas and Electricity Increase

Goods Prices Reach Highest Level Since August 2023

March CPI Set to Rise with Spike in Oil Prices

Interest Rate Cuts Pushed Even Further Away

On the 9th (local time), the regular gasoline price at a gas station located in Jackson Square, Manhattan, USA, showed $4.89 per gallon (cash price). Photo by Yoonju Hwang

The U.S. Consumer Price Index (CPI) for February met market expectations. The CPI for March, which will reflect the surge in energy prices caused by the Iran war, is expected to rise significantly. If high oil prices persist and inflation concerns resurface, it is anticipated that the Federal Reserve's timing for interest rate cuts will be further delayed.

February CPI in Line with Market Expectations... Food and Goods See Notable Increases

On March 11 (local time), the U.S. Department of Labor announced that the Consumer Price Index for February increased by 2.4% year-on-year. On a monthly basis, it rose by 0.3%. Excluding the more volatile categories of energy and food, the core CPI jumped by 2.5% year-on-year and by 0.2% compared to the previous month. Both the headline and core CPI for February were in line with the expert forecasts compiled by Dow Jones.

Looking at the details, energy prices in February increased by 0.6% compared to the previous month after seasonal adjustment. This represents a 0.5% rise from the same period last year. Gasoline prices fell by 5.6% year-on-year, but natural gas and electricity prices increased over the same period. In some regions of the United States, prices have been rising due to increased electricity demand from data centers.

Food prices jumped 3.1% year-on-year, marking the largest increase since August. The prices of goods excluding food, energy, and used cars rose by 1.7% compared to the same period last year, the highest increase since August 2023. This indicates that tariffs continue to exert upward pressure on consumer prices. However, the Federal Reserve believes that the impact of tariffs on prices will be temporary.

How Much Will March CPI Rise?... March Oil Prices Up About 26% from Previous Month

The February CPI released on this day does not reflect the surge in international oil prices following the U.S. and Israeli airstrikes on Iran that began on February 28. The market expects the CPI for March to spike. Since the Iran war, the price of West Texas Intermediate (WTI) crude oil futures in the U.S. has been trading at an average of about $82 per barrel in March. According to the Wall Street Journal (WSJ), this is a sharp increase of about 26% compared to the average price of $65 per barrel in February.

In response, the International Energy Agency (IEA) announced a recommendation to release a record 400 million barrels of crude oil from reserves, but this failed to calm market anxiety. On the New York Mercantile Exchange, the price of WTI crude oil for April delivery closed at $87.25 per barrel, up $3.80 (4.55%) from the previous session.

In a report released that day, JPMorgan Chase stated, "Given the volume of crude oil currently blocked from reaching the global market in this region, unless safe passage through the Strait of Hormuz is guaranteed, policy measures can have only a limited impact on oil prices."

Regarding the IEA-led release of strategic reserves, the analysis was, "While it may help, at this rate, it is unlikely to substantially offset the daily supply shortfall of 16 million barrels and will likely provide only a short-term buffer effect."

Stephen Brown, Deputy Chief North America Economist at Capital Economics, estimated that if oil prices remain at current levels, inflation in March could soar to 2.9%.

Concerns Over Prolonged High Oil Prices... Impact on the Path of Rate Cuts 

A customer is checking prices at a store in Grand Central Station, New York City, USA. Photo by Yoonju Hwang

The problem arises if the Iran war becomes prolonged. According to Goldman Sachs, for every $10 increase in international oil prices per barrel, this year’s gross domestic product (GDP) growth rate is expected to decrease by about 0.1 percentage points. Of greater concern is inflation. If international oil prices rise by 10%, the core CPI is expected to increase by 4 basis points (1bp = 0.01 percentage points), and the overall CPI could jump by as much as 28 basis points.

If high oil prices persist, costs will rise on the supply side, and corporate profits will fall. Companies that had previously absorbed tariffs without passing them on to retail prices may begin to raise consumer prices, potentially creating a vicious cycle that drives inflation, according to the Wall Street Journal (WSJ).

The market currently expects the Federal Open Market Committee (FOMC) meeting scheduled for March 18-19 to keep the benchmark interest rate unchanged at 3.5%–3.75%. Until last week, the expectation was that the Federal Reserve would raise rates in July and cut rates two to three times this year. However, if the March CPI jumps significantly and the upward trend continues, changes in the direction of monetary policy are likely.

Bernard Yaros of Oxford Economics commented, "The February Consumer Price Index only reflects price levels just before the U.S.-Israel-Iran war, so it is unlikely to have a major impact on monetary policy forecasts," adding, "Due to the war, a much higher inflation rate is expected to appear in March."

This content was produced with the assistance of AI translation services.