Cooling Inflation Meets a New Oil Shock as Gas Prices Surge Toward $4

Gas station signs flickered higher across the country this month, with the national average for regular gasoline barreling toward $4 a gallon just as official government data were signaling that inflation had finally cooled.

On paper, the February consumer price index suggested price pressures were returning to something like normal. At the pump, they suddenly were not.

The February report, released March 11 by the Bureau of Labor Statistics, is likely to stand as the last largely prewar snapshot of U.S. inflation before the conflict in Iran and the partial closure of the Strait of Hormuz upended global energy markets. Economists and policymakers are now treating it as the baseline against which a potentially significant energy-driven flare-up in prices will be measured.

A CPI report that looked close to normal

Headline consumer prices rose 0.3% in February from January and 2.4% over the previous 12 months, the same year-over-year rate as in January. Excluding food and energy, the so-called core index rose 0.2% on the month and 2.5% over the year.

Those mid-2% readings put inflation roughly in line with the Federal Reserve’s 2% target, but not firmly anchored there. Several underlying components remained hotter, especially in the service side of the economy.

Shelter costs, the single largest piece of the index, climbed 0.2% on the month and 3.0% from a year earlier. The rent of primary residence category rose just 0.1% in February, the smallest monthly increase since January 2021, suggesting some cooling. But housing inflation overall continued to run above the headline pace.

Services excluding energy services—a category closely watched by Fed officials as a gauge of persistent inflation—rose roughly 0.2% to 0.3% on the month and 2.9% over the year. Travel-related expenses and medical services logged notable gains, even as prices for some recreational services softened.

By contrast, goods inflation was largely subdued. Prices for commodities other than food and energy rose 0.2% on the month and 1.0% from a year earlier, reflecting normalized supply chains and softer demand for items such as furniture, appliances and used cars.

Food costs picked up somewhat, with the food index up 0.4% on the month and 3.1% over 12 months, as both groceries and restaurant meals added to the increase.

Energy, however, was still barely a factor in the February data. The overall energy index rose 0.6% from January and 0.5% from a year earlier. Gasoline prices increased 0.8% on the month but were 5.6% lower than in February 2025. Piped natural gas service, helped by colder weather, rose 3.1% in February and 10.9% over the year, but those gains were not yet tied to geopolitics.

That picture began to change at the end of the month.

War jitters hit oil—and the pump—within days

On Feb. 28, a U.S.-led coalition including Israel launched strikes on Iranian military and nuclear facilities in an operation widely reported as “Epic Fury.” Iran responded by restricting traffic through the Strait of Hormuz, a vital chokepoint for global oil shipments, and by targeting shipping and regional energy infrastructure in Saudi Arabia and elsewhere.

Benchmark Brent crude oil, which had been trading around $71 to $72 a barrel in late February, surged. In early March, prices climbed toward $80 and $85, then quickly broke above $100. On some trading days, Brent spiked close to $120 a barrel before plunging back below $90, underscoring the extreme volatility gripping the market.

By mid-March, Brent was oscillating in a broad range around $90 to just over $100 a barrel—far above the levels assumed in most economic forecasts for 2026.

The International Energy Agency called the resulting disruption “the largest supply disruption in the history of the global oil market,” estimating that roughly 8 million to 10 million barrels per day of output were affected as exports from Iraq’s southern fields shrank, Iran’s facilities came under repeated attack and Gulf producers rerouted flows.

On March 11, the same day the February CPI report was published, the IEA announced that its member countries would conduct the largest emergency stock release on record, pledging a combined 400 million barrels of crude and petroleum products to help stabilize markets. The volume far exceeds previous releases, including those coordinated in response to Russia’s invasion of Ukraine in 2022.

American drivers felt the shock within days. According to AAA data, the national average price for regular gasoline stood at about $2.98 a gallon just before the first strikes. By March 3, it had jumped to roughly $3.11, the biggest one-day spike in three years. By March 9, it was near $3.48. On March 11, it crossed $3.50, its highest reading since May 2024.

By March 18, the average price had climbed to about $3.84 a gallon, nearly 90 cents more than before the conflict. Several metropolitan areas, including parts of the Midwest and West Coast, reported averages at or above $4.

Those increases effectively act as a tax on households, economists say, and tend to hit lower-income and rural drivers hardest because they spend a larger share of their budgets on fuel and have fewer alternatives to driving. Higher energy prices can also seep into the costs of food, airline tickets, freight and other goods and services that depend heavily on transportation.

The Fed’s soft-landing plan gets harder

The timing has complicated the Federal Reserve’s efforts to guide the economy to a soft landing after its most aggressive rate-hiking campaign in four decades. Coming into 2026, with inflation drifting into the mid-2% range and goods prices largely flat, investors and many Fed officials expected a slow, deliberate series of interest-rate cuts later in the year.

Instead, at its March 17–18 policy meeting, the Federal Open Market Committee left its benchmark federal funds rate unchanged in a target range of 3.5% to 3.75%.

In its statement, the committee noted that “economic activity has been expanding at a solid pace” and that “inflation remains somewhat elevated.” It added that “uncertainty about the economic outlook remains elevated” and, in newly added language, warned that “the implications of developments in the Middle East for the U.S. economy are uncertain.”

The decision was supported by an 11–1 vote. Stephen Miran, a Fed governor, dissented, preferring a quarter-percentage-point cut.

Fed Chair Jerome Powell told reporters that progress in bringing inflation down “has been slower than we had hoped” and that any future cuts would depend on incoming data. He acknowledged that the jump in oil prices posed risks both to inflation and to growth, but said policymakers would focus on whether it filtered into broader measures of prices and wages.

The Fed typically gives less weight to temporary swings in headline inflation driven by energy or food, concentrating instead on core measures and on wage and service-sector trends that tend to be more persistent. But repeated or long-lasting oil shocks can affect inflation expectations and bargaining behavior, making it harder for central banks to look through them.

Why February may become the “before” picture

The February CPI report underscores that tension. On one hand, the numbers show an economy that had largely wrung out the worst of the price surge that followed the pandemic, supply-chain disruptions and Russia’s invasion of Ukraine. Goods inflation was tame, and rent growth was finally slowing.

On the other hand, shelter and core services costs were still rising faster than 2% a year, suggesting the underlying inflation process remained somewhat sticky even before oil prices climbed.

That combination leaves policymakers with less room for error. If the energy shock proves short-lived and strategic reserves help cap the damage, the impact on overall inflation this year could be limited. If oil remains above $100 a barrel for an extended period, the baseline established in February may quickly give way to renewed pressure on headline inflation, even as higher fuel bills weigh on consumer spending.

For households, the distinction between core and headline inflation is largely academic. They experience the price of filling up, heating their homes and buying groceries. For the Fed, the question over the coming months will be whether those visible increases begin to change how businesses set prices and how workers negotiate pay—and whether a period when inflation seemed at last to be returning to normal was simply the calm before another storm.