Anticipated escalation in Middle East tensions and rising gasoline prices likely contributed to an increase in U.S. consumer prices for February. With the recent conflict driving oil prices higher, inflation in March is projected to climb further.

The expected rise in the February Consumer Price Index also reflects the lingering pass-through effects of former President Donald Trump's broad-based import tariffs. These tariffs, enacted under a law applicable during national emergencies, were later ruled unconstitutional and repealed by the U.S. Supreme Court.

However, the consumer inflation report scheduled for release by the Labor Department on Wednesday is expected to show modest core price pressures for the previous month, influenced by relatively lower prices for used cars and airfares. This report is unlikely to impact short-term monetary policy, with the Federal Reserve widely expected to hold interest rates steady next week.

"February's CPI data will likely indicate that the disinflation process has stalled again," said Sarah House, Senior Economist at Wells Fargo.

House noted, "Although the Middle East conflict erupted at the end of February, market expectations of escalating tensions last month caused crude oil and gasoline prices to rise in advance."

A survey of economists forecasts that the CPI increased 0.3% month-over-month in February, following a 0.2% rise in January. Estimates range from a 0.1% to a 0.3% increase. For the 12 months ending in February, CPI is expected to have risen 2.4%, unchanged from January's rate, indicating the dissipation of high base effects from the previous year.

The U.S. central bank uses the Personal Consumption Expenditures (PCE) price index to gauge progress toward its 2% inflation target.

Economists project that gasoline prices within the CPI rose approximately 0.8% month-over-month in February, after two consecutive months of decline.

According to data from the American Automobile Association (AAA), gasoline prices at the pump have surged over 18% to $3.54 per gallon since the U.S. and Israel initiated conflict with Iran in late February. Oil prices had spiked significantly above $100 per barrel before retreating on Tuesday after Trump suggested the conflict could end soon.

**Conflict Increases Upside Risks for Food Prices**

"A 15% rise in oil prices alone could potentially boost overall inflation by 0.15 to 0.30 percentage points, depending on how the conflict evolves," said Andy Schneider, Senior U.S. Economist at BNP Paribas Securities.

Food prices are expected to maintain a modest increase, but Schneider added, "A sustained oil price shock would raise fertilizer and transportation costs, potentially pushing food inflation higher later this year."

Excluding the volatile food and energy components, core CPI is forecast to have risen 0.2% month-over-month in February, compared to a 0.3% increase in January. Declining used car prices, along with smaller increases in rent and airfares, are likely to have restrained the core CPI increase.

However, prices for goods such as apparel and household furnishings may have seen noticeable increases as businesses passed on import tariff costs. The January Producer Price Index (PPI) report showed margin expansion in sectors including retail trade of clothing, footwear, and accessories.

Although businesses have absorbed much of the import tariffs, economists suggest they are unlikely to continue doing so, partly because input costs remain elevated in the Institute for Supply Management (ISM) survey.

In response to the Supreme Court ruling, Trump proposed a global 10% import tariff, indicating plans to raise it to 15%.

"The issue is that there is evidence input costs are still rising, even if tariff levels have largely stabilized. This pass-through effect could persist for some time," said Stephen Stanley, Chief U.S. Economist at Santander US Capital Markets.

Core CPI is expected to have increased 2.5% for the 12 months ending in February, matching the January rise, also benefiting from favorable base effects.

Economists indicate that the modest core CPI reading for February does not necessarily imply a similarly soft core PCE inflation figure. Delayed PCE price index data for January, scheduled for release on Friday, is expected to show a significant rise in core inflation.

"Differences in weighting and unexpectedly strong PPI services prices could result in a noticeably larger increase for the broader consumption index. Similar effects might also cause the core PCE price index for February, released on April 9th, to be biased to the upside," said Lou Crandall, Chief Economist at Wrightson ICAP.