CPI, demystified

What It Covers

February's CPI showed 2.4% annual inflation — a five-year low — but economists at Wells Fargo, KPMG, and Rice University explain why the report is largely outdated due to the Iran conflict, rising energy costs, and tariff uncertainty reshaping the inflation outlook before March data even arrives.

Key Questions Answered

• •CPI vs. PCE Gap: The Fed targets the PCE deflator, not CPI, and right now a notable gap exists between the two measures. Current CPI data implies PCE inflation is running hotter than CPI suggests. Investors watching CPI for rate-cut signals should monitor PCE separately, as that is the metric actually driving Fed decisions.
• •Energy Price Lag: Gasoline prices rose in February before the Iran conflict began, reflecting oil markets already pricing in Middle East escalation risk. The March CPI report will capture the full shock. Natural gas is up 10.9% year-over-year, and a fifth of global supply now faces disruption through the Strait of Hormuz.
• •Tariff Deflation Paradox: San Francisco Fed research spanning 150 years finds tariffs can reduce inflation by slowing economic activity rather than raising prices. Uncertainty causes households and firms to cut spending, companies freeze hiring, and reduced demand suppresses prices — meaning tariff-driven disinflation signals economic weakness, not stability, and warrants close monitoring of labor market data.
• •Natural Gas US Shield: Despite global natural gas price spikes driven by interrupted Middle Eastern LNG exports, US consumers remain largely insulated because North America is self-sufficient in production. Seasonal demand drops in April should bring domestic prices down further, offering near-term household utility bill relief compared to Europe and Asia.
• •Fed Rate Path: Wells Fargo economist Nicole Servie argues the Fed will hold rates at current levels longer than previously anticipated. Disinflationary progress has stalled — year-over-year CPI and core CPI moved sideways in February — and an incoming energy price shock makes further restrictive policy the most likely outcome through at least mid-2025.