A global energy shock triggered by the Iran war sent U.S. inflation soaring in March, with the Consumer Price Index rising at a 3.3% annual rate, the highest reading in nearly two years.
By the numbers
Economists had predicted inflation would jump nearly an entire percentage point from 2.4% in February to 3.3% in March on an annual basis, according to the average of six separate forecasts reviewed by CBS News. The last time inflation was this high was in May 2024.
The CPI, a basket of goods and services typically bought by consumers, tracks changes in prices over time.
Inflation ran hot in March due to higher energy costs tied to the Iran war, which has constrained the flow of crude through the Strait of Hormuz, a critical chokepoint for global oil supply. The CPI data shows energy prices, driven by a spike in gasoline costs, rose 10.9% from the month prior.
Brent crude, which was trading at $73 a barrel before the war started on Feb. 28, traded at $95.88 as of Friday morning, while the U.S. benchmark hovered around $97.
Consumers got hit with higher prices at the pump last month, with gas prices rising 21.2% from February, according to the Bureau of Labor Statistics data. The agency said the jump represents the largest monthly increase since 1967.
U.S. gas prices have soared nearly 40% since the conflict erupted, with the national average at $4.15 a gallon on Friday, according to AAA.
A two-week ceasefire between the U.S. and Iran announced on Tuesday could ease gas prices if it holds, but energy experts said it will likely take weeks to recede below $4 a gallon.
Core inflation, which strips out volatile energy and gas prices, rose 0.2% on a monthly basis and 2.6% from a year earlier, lower than economists expected. Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in an email that this should “give the economy some room to absorb the higher energy price shock.”
The CPI reading follows the release of another key inflation gauge known as the Personal Consumption Expenditures (PCE) price index on Thursday, which showed costs were elevated even before the war erupted. PCE rose 2.8% on an annual basis in February, the same as January, but stubbornly above the Federal Reserve’s 2% annual target.
What the experts say
Economists told CBS News that higher energy costs could continue to push up other prices this year, such as apparel and food, in part because a sharp spike in diesel prices is raising transportation costs.
“This is only the beginning. Food prices, travel and shipping costs are all going up in April and will exacerbate the pain,” said Heather Long, chief economist at Navy Federal Credit Union, in an email.
Airlines are already offsetting higher fuel costs by raising airfares and, in some cases, introducing checked bag fees. Airline fares rose 14.9% on an annual basis in March, according to the CPI data.
Investors have assumed that geopolitical tensions will eventually fade and markets will rebound. However, Ed Yardeni of Yardeni Research warned in a note before the CPI release that inflation was heating up just before the war and could continue to rise through the end of this year.
In an email following the release of the report, Bernard Yaros, lead U.S. economist at Oxford Economics, said the April CPI reading will be “uncomfortably strong” as higher gas prices and a statistical quirk from the government shutdown, which disrupted data collection, add upward pressure to inflation.
“A key wildcard in the outlook for both inflation and monetary policy is the duration and intensity of the Iran war, which still hasn’t been resolved by the tenuous ceasefire,” he said.
While the jump in inflation may be worrisome, Yaros said the U.S. is in a different situation than in 2022, when economic pressures from the pandemic and Russia’s invasion of Ukraine pushed inflation to a 9.1% peak in June of that year.
Measures of global supply-chain stress “aren’t flashing red,” Yaros said, adding that the labor market hasn’t created additional inflationary pressure, as was the case in 2022. In the wake of higher gasoline prices, households will eventually have to cut back on non-discretionary expenses, which could be a source of disinflation, he added.
What does this mean for interest rates?
Analysts believe the Federal Reserve will continue to hold rates steady in the near-term as it assesses the inflationary impact of the Iran war. They pointed to the lower-than-expected core inflation reading, which does not reflect energy or food costs, as a sign that higher energy prices have not yet trickled into other categories.
“As long as the increase in gasoline prices is not translating into an increase in the core measures of inflation, then the Fed is probably not going to react to the noise in the headline measures of inflation,” Raymond James chief economist Eugenio Aleman said in an email.
The Fed is scheduled to meet from April 28 to 29.
In its last meeting in March, the central bank maintained the federal funds rate at its current range of 3.5% to 3.75%. It also pencilled in one rate cut for 2026. However, minutes released from the Fed’s March meeting this week signal that some members of the central bank’s 19-member interest-rate setting panel may be open to raising rates “if inflation were to remain at above-target levels,” the minutes said.
