Weekly Buzz: Inflation, and the road ahead for interest rates

The US Federal Reserve (Fed) cut interest rates three times in 2025 and paused in January. With inflation still above target and the Iran conflict now clouding the outlook, Wednesday's consumer price index (CPI) data offered the latest check on where things stand.

What’s going on here?

February's reading of the CPI, which tracks the prices of everyday goods and services in the US, came in as expected. Headline inflation held at 2.4% year-over-year, while core inflation, which strips out food and energy, stayed at 2.5%. Both matched January's figures, with the annual core reading at its lowest since April 2021.

The in-line result reinforces the case for keeping interest rates where they are. The Fed meets next week and is widely expected to hold at 3.5%–3.75%, with markets now pricing in the next cut in July or September at the earliest.

Fed Chair Jerome Powell's term ends in May, with Kevin Warsh nominated to replace him. Warsh has historically leaned hawkish on inflation, though he's recently signalled openness to rate cuts. His approach once in the role will shape the rate outlook.

What’s the takeaway for investors?

February's inflation numbers were neither too hot nor too cool, but investors are already looking past them. The data was collected before the Iran conflict rattled oil markets. Since then, gasoline prices in the US have climbed, and sustained higher energy costs will feed through to transport, manufacturing, and consumer goods. The bigger test for inflation will come in the March and April readings, once the effects of the conflict filter through.

This article was written in collaboration with Finimize.

In Other News: The case for staying invested through turbulence

Stock markets have swung on each new development in the conflict between the US, Israel, and Iran: the S&P 500 fell as much as 1.5% on Monday before recovering on comments from President Trump suggesting the war would end soon. Oil prices, meanwhile, spiked past US$110 before easing on reports that the International Energy Agency has agreed to its largest-ever release of emergency reserves.

With markets reacting rapidly to every headline, it helps to step back and look at what past conflicts tell us. A study by the Royal Bank of Canada across 20 major military conflicts found the S&P 500 dropped about 6% on average and recovered within 28 trading days. LPL Financial's review of 40 geopolitical events over 85 years showed similar results, with stocks typically regaining lost ground within six weeks.

Look further out and the case strengthens. Research from Birinyi Associates found the S&P 500 returned an average of 12.5% in the twelve months after US military conflicts began, compared to the long-run average of 9%.

The urge to step aside during volatility is natural, but for long-term investors, exiting to cash carries its own risks. Cash loses value to inflation over time, and leaving the market means potentially buying back in at higher prices. The data across decades of conflict suggest that sitting on the sidelines costs more than simply staying invested through the turbulence.

(If you're looking to add resilience to your portfolio, consider gold or defensive sectors like utilities through Flexible Portfolios.)