Key Inflation Gauge Worsened in January, before Iran War Lifted Gas Prices

The Associated Press

11:28 JST, March 14, 2026

WASHINGTON (AP) — An inflation gauge closely monitored by the Federal Reserve moved higher in January in the latest sign that prices were persistently elevated even before the Iran war caused spikes in oil and gas costs.

Prices rose 2.8% in January compared with a year earlier, the Commerce Department said Friday, slightly below December’s increase in a report that was delayed by last fall’s six-week government shutdown. The shutdown created a backlog of data that is nearly cleared.

Yet excluding the volatile food and energy categories — which the Fed pays closer attention to — core prices rose 3.1%, up from 3% in the prior month and the highest in nearly two years.

On a monthly basis, prices rose 0.3% in January, while core prices jumped 0.4% for the second straight month, a pace that if sustained would lift inflation far above the 2% annual target set by the Fed.

The data has since been overtaken by the war with Iran, which began Feb. 28 and has shut down the Strait of Hormuz, cutting off one-fifth of the world’s oil supply. Oil prices have soared more than 40% since the war began and gas prices have jumped to $3.60 a gallon from just under $3 a month earlier, according to AAA. Those figures will likely cause inflation to spike in March and potentially April, economists forecast.

The inflation-fighters at the Fed have kept their key interest rate elevated to slow borrowing, spending, and growth in an effort to cool inflation further. Fed policymakers meet next week and are widely expected to keep their rate unchanged given that the conflict in the Middle East will raise inflation, at least in the short run.

The report also showed that consumers lifted their spending at a solid 0.4% pace in January, matching December’s rise and a sign that Americans are still able to drive steady growth. Consumer spending powers about two-thirds of the economy.

Incomes also rose 0.4%, a positive sign that consumers didn’t have to dip into savings to propel spending in January. After-tax incomes jumped 0.9%, fueled by a large increase in Social Security benefit payments after a large cost of living adjustment took effect at the start of the year.

Friday’s report includes the personal consumption expenditures price index, which is separate from the more widely-followed consumer price index, which was reported on Wednesday. The PCE index is running hotter than the CPI, largely because it puts much less weight on rental costs, which have been cooling steadily in recent months.

The PCE index typically runs below the CPI, but has pulled ahead of it just in the past few months.