Iran war lifts March inflation 3.3%, threatens Fed rate cuts

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The latest inflation report showed a clear hit from the Iran war as gas prices surged and lifted consumer costs, making it harder for Federal Reserve policymakers to reach their 2% inflation goal. The Labor Department said consumer prices rose 3.3% in March from a year earlier, up sharply from 2.4% in February, and it also reported a 0.9% monthly increase in March from February. The report was widely viewed as the first major read that captures the inflation effects of the war’s impact on energy prices, particularly at the pump.

On a monthly basis, price growth accelerated to 0.9% in March from February, which the Labor Department described as the largest such increase in nearly four years. Economists and analysts said the gas-price jump would stretch household budgets—especially for lower- and middle-income consumers—by eroding purchasing power for other necessities such as food and rent.

Stripping out food and energy, the Labor Department reported that so-called core prices rose 2.6% in March from a year earlier, up from 2.5% in February. It also reported that core prices increased 0.2% last month, a smaller monthly move that suggested the energy shock had not yet spread broadly into other categories.

The central question for the Fed now is how long the gas-and-oil price shock lasts and whether it develops into a broader inflation increase. Economists said the overall outcome remains uncertain, even as a cease fire remained tenuous in the Strait of Hormuz, where millions of barrels of oil typically pass daily. They also drew comparisons to the spring of 2022, when Russia’s invasion of Ukraine helped produce a much wider inflation surge that later peaked above 9%.

Michael Pearce, chief U.S. economist at Oxford Economics, said the near-term pain could continue. “It’s painful in the near term,” Pearce said, adding, “It’s going to get more painful in April,” when further gas price increases would lift inflation higher. Pearce also suggested the shock might not look like 2022, telling AP that the situation may be “much more like a short, sharp shock” than what the U.S. saw after the Ukraine war.

Cost pressures already show up in parts of the economy tied to fuel. Industries that rely heavily on oil and gas are paying more, and airlines have passed on higher costs to travelers, with AP reporting that fares rose 2.7% last month and were 14.9% higher than a year earlier. Shipping and delivery firms, including UPS and FedEx, have also announced fuel surcharges that raise shipping costs for businesses and households.

Food-price dynamics also reflect the transmission mechanism from energy prices. Grocery prices slipped 0.2% last month and were up 1.9% from a year earlier, but economists told AP that diesel costs would likely push food prices higher in coming months because most food is shipped by truck. Andy Harig, a vice president at the FMI-The Food Industry Association, said higher energy prices “contribut[e] to rising production costs across the food supply chain” and could raise grocery prices going forward.

The shock is appearing in consumer mood as well. The University of Michigan said its Index of Consumer Sentiment fell to 47.6 in April, down from 53.3 in March, describing a sharp decline tied largely to the Iran conflict and worries about higher gas prices. Joanne Hsu, the university’s director of consumer surveys, said “Many consumers blame the Iran conflict for unfavorable changes to the economy,” linking sentiment to the perceived effect of the war on day-to-day costs.

Higher gas prices also raise political stakes in an election year. AP reported that high prices angered American voters even before the war, and it said the spike in costs for oil and everything tied to it—from the pump to groceries—could make it harder for the president’s party to hold seats in the House and Senate in the midterms. In polling conducted by the Associated Press-NORC Center for Public Affairs Research, about six in 10 Republicans said they were at least “somewhat” concerned about affording gas in the next few months.

For businesses, the fuel-cost increase is arriving on top of other recent expenses. Kyle LaFond, founder of American Provenance, a personal care product manufacturer near Madison, Wisconsin, told AP that shipping costs had risen between 30% and 40%. He said the increases followed tariff costs that the company absorbed before it raised its own prices by 20% to 30% last September, and he warned that if the fuel price spike continues into early summer, the company might face another round of price increases.

AP reported that gas prices averaged $4.15 a gallon nationwide Friday, up from $2.98 on the day before the war began—an increase of nearly 40%—according to AAA. Economists said the impact differs from 2022 in part because demand and the job market are weaker now and because there are no large government stimulus checks boosting consumer spending. Alan Detmeister of UBS said the country is not seeing demand strength similar to earlier periods, noting that in 2021 and 2022 income growth “was increasing really strongly” while the current environment looks different.