Numbers released this morning by the U.S. Bureau of Labor Statistics show that the headline year-over-year inflation rate was unchanged in February at 2.4%—higher than consumers and the U.S. Federal Reserve (the Fed) would like, but fairly close to the  2% target and not showing signs of heating up. (We will get Canadian numbers for February next week.)

Core inflation, which strips out food and energy prices, was running at 2.5% on a year-over-year basis, unchanged from January and the lowest since March 2021. The cost of food was still rising faster than the overall rate at 3.1%, up from 2.9% in January.

A spanner has, however, been thrown into the inflation works by the Iran war. The February print was not affected by the conflict, which didn’t get underway until February 28, but it will be a key factor in March and likely beyond with gasoline prices already higher. Gasoline prices are a hot-button political issue in the U.S. leading into the midterm elections in November, there will be pressure on the Trump administration to keep price pressures in check. 

What will the Fed do?

If the conflict is short and the spike in energy and fertilizer prices unwinds rapidly, the impact on inflation will be temporary and, in turn, something the Fed can look past.

If it is the other way around and the upward pressure on prices is sustained, the Fed (and other central banks) will be forced to consider delaying rate cuts or possibly even raising rates.

The Fed’s dual mandate of maximum employment and price stability complicates this as some interest rate relief would be a welcome boost to what appears to be stalled job growth.

With the war in play, it is a highly uncertain time. Markets are expecting the Fed to hold at its meeting next week and are currently pricing in one rate cut this year with a 50/50 chance of a second one.

Speaking of the U.S. economy  

The U.S. economy has been defying its critics for some time now with real GDP growth averaging 2.6% over the last three years. Canada’s economy, for comparison, only grew by an average of 1.8% over the same period despite faster population growth.

U.S. growth cooled in the fourth quarter to 1.4% annualized, but is now tracking just over 2% in the first quarter of 2026. While GDP growth has remained solid, job creation has slowed to a crawl and there are signs of a K-shaped expansion, with higher-income households driving the spending gains.

Softer inflation readings due in part to a weaker economy have led the Bank of Canada to cut interest rates more aggressively than the U.S. Federal Reserve.

Looking ahead, we see the U.S. economy continuing to grow this year by a healthy 2.4% (outpacing Canada at 1.4%) with tax cuts, the ongoing AI boom, and consumer spending strong enough to offset a cooling labour market and tariffs.

A key wildcard is the U.S. consumer. The longstanding resilience of the U.S. consumer will be tested by higher unemployment, elevated gasoline prices (even if short-lived), and the potential for interest rates to stay where they are rather than come down.

Answer to the previous trivia question: Potash is called "potash" because it was historically produced by leaching wood ashes with water and evaporating the resulting solution in large iron pots, leaving behind a white, potassium-rich residue, or ash.

Today’s trivia question: Who is the current U.S. Secretary of Labor?