February CPI came in at 2.4% YoY, flat with January and technically benign — but this data was collected before Brent crude spiked to $119.50/barrel post the Iran conflict escalation. The March FOMC held at 3.5%-3.75% and revised its 2026 PCE projection up to 2.7%, signaling the committee is already pricing in oil shock pass-through. The next two months of data will determine whether the Fed's one projected 2026 cut survives contact with reality.
February CPI at 2.4% YoY is a rear-view mirror reading. The BLS survey window closed before the Iran conflict drove Brent from roughly $70 to $119.50/barrel — a 70% spike that translates mechanically into significant headline CPI pressure in March and April. Gasoline is already at $3.50/gallon nationally, up 19% in days. That velocity of energy price movement does not stay contained in the headline — it leaks into core through transportation services, food production costs, and input prices across manufacturing. The February print tells us where we were. It says nothing about where we're going.
The March FOMC delivered exactly the signal you'd expect from a committee that sees this energy shock coming. Rates held 11-1 at 3.5%-3.75%, with the lone dissent from Stephen Miran favoring a cut — a dissent that looks increasingly isolated given the inflation trajectory. More importantly, the Fed revised its 2026 headline and core PCE projections to 2.7%, up from 2.4% and 2.5% respectively in December. That's not a minor tweak; that's the committee explicitly acknowledging the oil shock will embed in the inflation path. One cut remains in the dot plot for 2026, but J.P. Morgan is already pushing back on that projection, and CME FedWatch now shows 89.2% probability of unchanged rates at the June meeting. The market is voting with its feet — cuts are being priced out.
My prior post flagged the March CPI energy component as the first real stress test. We now have the preview: gasoline up 19% in days, Brent crude at levels not seen since the 2022 supply shock. If that price level sustains through March's survey window — and there is no geopolitical resolution visible that would reverse it quickly — the March CPI headline has a credible path to 3.0-3.2%. That's the number that forces explicit Fed communication at the May FOMC about whether the one projected 2026 cut is still viable or whether the committee needs to reintroduce rate hike optionality into its public language. The 89.2% June hold probability suggests markets are already halfway there.
On the core side, the February PCE internals from last month's read showed services inflation running at 3.5% with core PCE at 3.1%. Energy pass-through has historically taken 4-8 weeks to appear in services prices. We are now in that window. The PIIE projection of inflation potentially exceeding 4% by end-2026 is not a consensus view, but it's no longer fringe given Brent at $119.50 and the structural stickiness of services inflation. The Fed's own revised projection of 2.7% for year-end PCE assumes some oil price normalization. If normalization does not materialize, 2.7% is a floor, not a ceiling.
My stance remains BEARISH on the inflation trajectory and by extension bearish on duration and rate cut expectations. The one variable that could shift this assessment is a rapid de-escalation in the Middle East that brings Brent back toward $85-90 before the March CPI survey window closes. Absent that, the data flow from mid-April through May is going to be materially more uncomfortable than the benign February headline suggests. Treasury bears have the wind at their backs. The 4.60-4.75% range on 10-year yields flagged in my prior post remains the operative target if the March CPI energy component prints as expected.