Analysis: Assessing inflation’s impact

Inflation is the pace at which prices rise, and the newest data show incremental slowing. The February 2026 Consumer Price Index (CPI) held at 2.4% over the past year and rose 0.3% for the month, which keeps the “last mile” back toward the Federal Reserve’s (Fed) 2% inflation target in focus. At the same time, household budgets still feel pressure because shelter inflation remains a elevated, holding core CPI (which excludes food and energy) at 2.5% year over year. ¹ Investors also track the Bureau of Economic Analysis’ Personal Consumption Expenditure price inflation because the Federal Reserve uses it when defining its inflation target, and January’s PCE price index rose 2.8% from a year earlier. ² However, investors have recently focused more on the path ahead, with oil transportation constraints in the Middle East triggering rising energy prices and fueling fears of higher inflation.

CPI: Headline inflation, core inflation, and shelter

Headline CPI rose 0.3% in February after a 0.2% increase in January, and CPI increased 2.4% over the past 12 months. Core CPI, which removes food and energy to show the underlying trend, rose 0.2% for the month and increased 2.5% from a year earlier. ¹ In plain terms, inflation is not re-accelerating for now, but it remains high enough that interest rate expectations can shift quickly when new data arrives.

Shelter remained the largest driver of February’s increase, with the shelter index up 0.2% for the month and up 3.0% over the past year. Rent rose 0.1% in February, one of its smallest monthly increases in several years, which is a sign that housing-related inflation pressure is cooling. ¹ That matters because stable to lower home prices, mortgage rates, and rents can ease shelter inflation over time and help offset pressure from higher prices in goods categories.

Shelter inflation often shows up late in the official data because leases reset over time rather than all at once. In a December 15, 2025 speech, Fed Governor Stephen Miran explained that the Fed’s preferred PCE shelter index lags market rents because rents typically reset when people move or renew their leases. He said the earlier “catch‑up” in measured shelter inflation is largely complete and described current elevated readings as an after‑echo of past imbalances, which is why he expects shelter inflation to fall faster as the data catch up to today’s slower rent growth. ³

Iran conflict complicates the inflation outlook

Geopolitical conflict can drive higher inflation when it disrupts energy supply or raises shipping and insurance costs. A rise in oil and gasoline prices can push headline inflation higher quickly, and it can also lift costs across transportation and supply chains, eventually reaching store shelves as sellers seek to recoup their higher costs. If higher energy costs persist, they can act like a tax on consumers and companies—dampening growth while also raising inflation pressures.

That is the hard scenario for the Federal Reserve because an energy shock can create higher inflation and slower growth at the same time. The Fed’s mandate is commonly described as a dual mandate, represented by maximum employment and stable prices. A shock that raises prices and weakens hiring can put those goals in tension. In that environment, the Fed may need to balance inflation risks against labor-market risks, which can increase uncertainty around the timing and number of rate cuts.

“Markets are sensitive to sustained, accelerating inflation,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. However, Haworth also warns that inflation is not the only trigger for market volatility, adding, “Further labor market weakness may suggest higher economic slowdown odds, which would represent a material market development.”

Tariffs: Why the inflation impact remains uncertain

Tariffs remain an important wild card for inflation because they can raise the cost of imported goods and the materials used to make them. Recent legal and policy developments have also made the outlook more uncertain: the Supreme Court ruled that President Trump cannot impose tariffs under the International Economic Emergency Powers Act (IEEPA), which canceled most of the 2025 tariffs tied to that authority. After the ruling, the administration announced a temporary 15% global tariff under Section 122, which allows tariffs for up to 150 days while other options are investigated.

Even if headline tariff rates change, the overall tariff burden could remain meaningfully higher than it was in 2024. One simple way to track this is the “effective tariff rate,” which estimates the average tariff cost by comparing customs revenue to the total value of goods imports. Businesses can absorb part of the cost, pass part through to consumers, or shift supply chains, so tariffs can influence inflation in uneven ways and with a delay. “Investors watch inflation closely because of the impact on personal budgets, making tariff-related impacts an important topic,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management Group.

PCE: Inflation gauge the Fed watches most closely

The Personal Consumption Expenditures (PCE) price index matters because the Federal Reserve uses it as the benchmark for its 2% inflation goal. In January, the PCE price index rose 0.3% from the prior month and increased 2.8% from a year earlier. Excluding food and energy, PCE prices rose 0.4% for the month and increased 3.1% over the past year, which helps explain why the Fed still wants confidence that inflation is moving sustainably lower. ²

The same report also shows why inflation can cool slowly when demand remains steady. In January, personal income increased 0.4%, disposable personal income increased 0.9%, and consumer spending rose 0.4%, while the personal saving rate was 4.5%. ² When households keep spending, especially on services, prices can remain firmer in the parts of the economy that tend to cool last.

Interest rates: What is the Fed projecting and what are markets pricing in?

The Fed’s December 2025 Summary of Economic Projections (SEP) provides a useful baseline for the end of 2026. In that SEP, the median projection for the federal funds rate at the end of 2026 was 3.4%, alongside projections that inflation would continue moving closer to 2% over time. ⁴ This baseline supported optimism that, before the Iran war, inflation was trending down toward the Fed’s target rate, in part because shelter inflation was easing.

Market pricing can differ because it updates continuously as new inflation and growth data arrive. In the latest CME FedWatch snapshot, accessed March 13, 2026, markets assign a 39% probability of zero cuts by the end of 2026 and a 61% probability of one or more cuts. ⁵ That split captures the debate in plain language: the pace of inflation improvement (and the growth backdrop) will likely determine whether rate cuts resume or stay limited.

What investors should do

The best response to an uncertain inflation path is to stay focused on what you can control. Inflation remains a key driver of interest rates and market volatility, and tariffs and energy shocks can create short-term setbacks even when the longer-term trend is improving. A disciplined plan and a broadly diversified portfolio can help investors avoid making lasting decisions based on a single report or a short burst of volatility.

If inflation continues to cool, especially if shelter inflation keeps easing with a lag, the case for lower rates can strengthen. If energy prices rise sharply or tariffs become more inflationary than expected, the timeline can shift. Talk with your financial professional about how your portfolio aligns with your goals, time horizon, and comfort with short‑term swings, and discuss whether any adjustments make sense for your situation.

FAQs

What is the current inflation rate (February 2026)?

In February, CPI increased 2.4% over the past 12 months, and prices rose 0.3% for the month.¹ Those figures reflect the average change in prices across a broad basket of goods and services. Inflation can still feel uneven because housing, food, and energy prices can move differently than the overall average.

Why does “core” inflation matter?

Core inflation removes food and energy because those prices can jump up or down quickly from month to month. In February, core CPI rose 0.2% for the month and increased 2.5% from a year earlier, which helps show that underlying inflation pressure remains.¹ Core measures can be useful because they often provide a clearer signal about whether inflation is easing in the parts of the economy that move more slowly

Why does the Fed focus on PCE inflation instead of CPI?

The Federal Reserve has said it targets 2% inflation as measured by the Personal Consumption Expenditures (PCE) price index over time. PCE can better reflect how consumers shift what they buy when prices change, and it covers a broader set of spending categories. That is why PCE inflation often carries more weight when investors think about the path of interest rates.