WASHINGTON — A key inflation measure tracked by the Federal Reserve jumped 0.7% in March from the previous month, pushing the annual inflation rate to 3.5% and marking the highest level in nearly three years, the Commerce Department reported Thursday. The surge was driven overwhelmingly by gas prices, which spiked as the war in Iran disrupted global energy markets.
The one-month increase in the personal consumption expenditures price index was sharply higher than February’s reading and reinforced Fed Chair Jerome Powell’s signal a day earlier that the central bank would hold interest rates steady for months as it evaluates the war’s economic fallout.
“We’re very well aware that people are experiencing higher gas prices all over the country now,” Powell said at a news conference Wednesday. “And that hurts.”
Excluding the volatile food and energy categories, core inflation rose 0.3% in March from February and stood 3.2% above a year earlier, up from 3% in February. The Fed typically focuses on core prices as a better gauge of underlying inflation trends, and the direction of that measure will heavily influence the central bank’s next moves.
The report illustrated the direct channel from geopolitics to American household budgets. Gas prices surged nearly 21% in March from the prior month, according to the Commerce Department data, while grocery costs actually slipped 0.1%. Clothing prices rose 1% in March alone.
The national average price of a gallon of gas reached $4.30 on Thursday, according to AAA, up from $2.98 before the war began. U.S. oil prices eased slightly on Thursday morning but remained above $105 a barrel — a more than 50% increase from roughly $67 before the conflict.
Alongside the price pressures, Thursday’s report showed that consumer spending rose 0.9% in March, though most of the increase reflected higher prices rather than increased purchasing. After adjusting for inflation, spending edged up only slightly, suggesting consumers were largely treading water against rising costs.
Americans’ incomes — including wages, business income, and government benefits — increased 0.6% in March, a solid gain that nonetheless trailed inflation for the second consecutive month.
The squeeze is reshaping the broader economic outlook. Joe Brusuelas, chief economist at RSM, a tax and advisory firm, said the war had “partially derailed” what had been a year poised to benefit from tax cuts and a boom in artificial-intelligence investment.
“Unfortunately, war and the supply shock that ensued has altered the probable growth path this year,” Brusuelas said. He now expects the U.S. economy to expand 1.7% this year, down sharply from an earlier estimate of 2.4%.
The economy grew at a modest 2% annual rate in the first three months of the year, a separate Commerce Department report showed Thursday, rebounding from a 0.5% expansion in the final quarter of last year, when growth was held back by a six-week government shutdown. Still, consumer spending growth slowed compared with the prior quarter.
The Fed has kept its benchmark short-term interest rate unchanged after cutting it three times last year. The central bank typically keeps rates elevated, or raises them further, to combat higher inflation. Powell’s comments Wednesday made clear that any additional cuts are on hold as policymakers assess how much of the energy shock will feed through to core prices in the months ahead.