Inflation Gauge Worsened in January Before Iran Conflict Triggered Gas Spike

The release of January’s Personal Consumption Expenditures (PCE) price index has sent a clear and sobering signal to markets: the battle against inflation was losing ground even before geopolitical instability introduced a fresh supply-side shock. The data shows that price pressures in the services sector and core goods remained stubbornly high, suggesting that the 'last mile' of the Federal Reserve's inflation fight is proving to be the most difficult. This 'pre-war' acceleration is a critical development because it strips away the argument that current price spikes are purely the result of temporary geopolitical friction.

Historically, the Federal Reserve has been able to 'look through' energy price spikes caused by international conflict, provided that core inflation—which excludes volatile food and energy costs—remains on a downward trajectory. However, the January data indicates that core inflation was already trending upward. This creates a 'double bind' for central bankers. If they raise rates to combat the underlying core inflation, they risk deepening a recession already threatened by high energy costs. If they pause or cut rates to support the economy through the energy shock, they risk allowing core inflation to become permanently entrenched in the economy.

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The resilience of the labor market remains the only significant buffer, but even that may be tested if consumer spending retreats under the weight of $5-per-gallon gasoline and 7% mortgage rates.

Industry context suggests that the consumer is now facing a pincer movement. In January, the primary drivers of inflation were housing and insurance costs. Since the outbreak of hostilities with Iran in February, these have been joined by a rapid escalation in retail gasoline prices, which have jumped by an estimated 18% in the last three weeks alone. This secondary shock is expected to bleed into the February and March CPI and PCE reports, potentially pushing headline inflation back toward levels not seen since the post-pandemic peak. For sectors like logistics and aviation, the timing could not be worse, as they must now contend with both high borrowing costs and soaring fuel surcharges.