Inflation overshoots market estimates in February

Latest reading: Consumer prices increased 3.4% on a year-on-year basis in February, following a 2.5% rise in the prior month, coming in well above market expectations. January and February readings were distorted by a calendar effect from the timing of the Lunar New Year holidays in 2025 and 2026. Relative to the prior month's figures, there were higher price pressures for food (+5.9% on a year-on-year basis vs +3.9% in January), transportation (-4.9% vs -5.4% in January) and education (+9.9% vs +9.8% in January). Finally, the variation in housing and construction materials prices was the same as in the prior month (+4.3% in both February and January). Lastly, consumer prices increased 1.14% in February on a month-on-month basis, following a 0.05% increase in the previous month.

Outlook: Inflation will likely hover near current levels in 2026, well below the 4.5% target. That said, much will hinge on the trajectory of the U.S.-Iran war. In early March, gasoline prices climbed around 30% from pre-conflict levels, while diesel surged nearly 60%. This pushed the government to roll out contingency plans to secure fuel supplies and adopt a more flexible pricing system. The authorities also cut import tariffs on selected petroleum products—sacrificing government revenue to minimize the negative effect on businesses. At the same time, they ordered crude that had yet to be committed for export to be sold to domestic refineries to prevent fuel shortages in the country. If the Strait of Hormuz stays shut and oil prices remain high for an extended period, inflation could rise at a faster pace.

Panelist insight: Commenting on the outlook, analysts at Emerging Market Watch stated: “If the [U.S.-Iran] conflict remains uncontrolled, further upward adjustments to domestic fuel prices are likely. This would add additional pressure on inflation in the coming months as higher energy costs ripple through transportation, logistics, and production across the broader economy.”

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