US Core Inflation Slows to 3.1% in February Amid Escalating Iran Tensions

US core inflation declined to 3.1% in February, down from 3.4% in January, marking the slowest pace since July 2022. This moderation, driven by cooling services and housing costs, suggests inflation pressures are easing despite heightened global tensions. The data comes as military escalation between Iran and regional allies intensified, raising fears of a wider Middle East conflict. The Federal Reserve now faces a complex balancing act: lower inflation supports the case for rate cuts, potentially boosting bond and equity markets. However, the risk of a war involving Iran threatens to disrupt global oil supply chains. Crude oil futures (CL=F) spiked 6.2% in early March, closing above $89 per barrel, as traders priced in potential supply shortages from the Strait of Hormuz. Stocks in the defense sector showed strong gains, with Raytheon Technologies (RTX) up 8.5% and Lockheed Martin (LMT) rising 6.7% over the same period. Apple (AAPL) saw modest gains of 1.4%, as investors weighed inflation cooling against broader market risk sentiment. The CBOE Volatility Index (^VIX) jumped to 24.3, its highest level since November 2023, reflecting increasing market uncertainty. The interplay between disinflationary trends and geopolitical risk has created a volatile environment. While lower inflation supports a dovish Fed stance, the potential for supply disruptions could reverse progress. Markets are now pricing in a 60% probability of a rate cut in June, though that outlook remains sensitive to developments in the Middle East.