US inflation rose to 2.4% year-on-year in February, slightly above the Federal Reserve’s 2% target, but still in line with market expectations.
While core inflation remained steady at 2.5%, analysts warn that the real pressure on prices is yet to come, with rising oil costs and geopolitical tensions set to challenge both consumers and policymakers. Investment strategists highlight that, despite a soft jobs report, the Fed is unlikely to cut rates in the near term, with the focus shifting to longer-term risks from energy markets, tariffs, and Middle East conflict.
Investment specialists have been sharing their reaction to the data, providing context on the evolving inflation landscape and implications for investors, underlining the importance of diversification and strategic positioning.
Lindsay James, investment strategist at Quilter said:
“Today’s US inflation print reveals CPI rose to 2.4% in the 12 months to February and 0.3% on the month, with core inflation holding relatively steady at 2.5%. Given oil prices only began to edge higher last month, we can expect a much larger impact to come through in the March data.
“With the US economy expected to run hot into mid-term elections, alongside tax rebates, a focus on cost-of living and pressure on the Fed to cut interest rates, companies may feel able to push a greater proportion of tariff costs onto end consumers. We’re already seeing importers of clothing, footwear and household goods lifting prices at a quicker pace, with apparel rising 1.3% in February, and that may continue in the months ahead.
“That said, there are some offsetting forces. Used car prices and transportation costs have helped soften overall inflation – although the latter may see a sharp reversal as we move into the spring and summer months.
“Regardless of today’s figures, the Federal Reserve is widely expected to hold rates next week. Markets are working on the assumption that no further cuts will take place during Powell’s tenure as Chair, and attention is instead turning towards the arrival of Kevin Warsh later in the spring. However, the degree to which the Fed will look through rising energy costs is uncertain, and investors are not fully pricing in the next quarter point rate cut until September, despite concerns that the latest jobs report revealed cracks in the idea of a strong US economy. That has inevitably reopened the conversation about stagflation, though we are still quite some distance from that scenario.
“Extreme cold weather across the US will have had an impact on short term data, while the earnings picture remains robust and the economy continues to enjoy a significant boost from ever growing levels of AI-related capital expenditure. As ever, the outlook will depend on factors beyond the Fed’s control, with the duration of the latest Gulf conflict and its impact on energy flows the most significant.”
Commenting on US inflation at 2.4% though tougher months lie ahead, Lauren Hyslop, Fund Manager at Mattioli Woods, said:
“Today’s US inflation data came in at 2.4% year-on-year in line with forecasts. Whilst maintaining the gradual trend down its still ahead of the Fed’s 2% target, and threatening to start heading in the wrong direction. Worse still, the figures won’t yet capture the impact of surging oil prices following the conflict with Iran and the closure of the Strait of Hormuz. American consumers will soon feel the pain at the pump, thought to be in the region of a 10 to 15% increase – unwelcome news for households already feeling the pinch, and potentially damaging for the Republican Party ahead of November’s midterms. For the Fed, a rate cut next week looks well and truly off the table. With inflation sticky and oil prices threatening to push it higher, the prospect of easing haS been pushed further out, despite last Friday’s soft jobs report. Given the idiosyncratic factors behind that jobs data, policymakers are likely to look through its weakness, particularly in light of the uncertainty of repercussions caused by the closer of the Strait of Hormuz.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) comments:
“Even though US inflation was broadly as expected, the figures refer to February, before the start of the conflict in the Middle East. Oil prices have spiked in early March and geopolitical risks make the outlook more uncertain than ever. The central issue for investors is whether higher oil prices feed through into broader inflation and how central banks respond.
“Energy futures suggest markets are pricing near-term scarcity rather than a lasting supply shock, with longer-dated prices remaining relatively anchored. Yet if the stagflationary impulse persists, policymakers may have little choice but to stay on hold even as growth slows. An underappreciated scenario is that central banks cut later but more aggressively if weaker growth eventually proves disinflationary.
“The Iran conflict is unfolding alongside the implementation of a flat US global tariff rate and legal challenges from firms seeking refunds, adding another layer of uncertainty to the global outlook.
This makes the job of central banks more complex, especially for the Fed given its dual mandate of price stability and full employment.
“A further downside surprise in non-farm payrolls may strengthen the case for easing, but policymakers are unlikely to overreact to a single data point. Inflation expectations remain the critical variable. A disorderly rise could force central banks to stay on hold or even tighten further.
“At the onset of the Iran conflict, we increased our exposure to gold and reduced government bonds vulnerable to inflation spikes, while continuing to diversify across regions and asset classes. The best approach for investors is to avoid reacting to headlines, remain diversified and prepare portfolios for a range of possible scenarios.”
