Inflation Surges to 3.3% in March

U.S. consumer prices increased by the most in nearly four years in March as the war with Iran boosted oil prices and the pass-through from tariffs persisted, further diminishing chances for an interest rate cut this year.

The Consumer Price Index jumped 0.9% last month, the Labor Department's Bureau of Labor Statistics said Friday, the largest increase since June 2022 when prices soared in response to the Russia-Ukraine war.

Consumer prices rose 0.3% in February. In the 12 months through March, the CPI advanced 3.3% after rising 2.4% in February. That is on target with forecasts by economists polled by Reuters, who foresaw CPI accelerating 0.9% and increasing 3.3% year-on-year.

The jump in consumer inflation followed in the wake of a sharp rebound in job growth last month, which suggested the labor market remained stable.

There are, however, concerns that a prolonged conflict in the Middle East could undercut the labor market, especially if households respond to high prices by pulling back spending.

The U.S.-Israeli war with Iran has sent global crude oil prices surging more than 30%, with the national average retail gasoline price breaking above $4 a gallon for the first time in more than three years.

Though President Donald Trump on Tuesday announced a two-week ceasefire on the condition that Tehran reopen the Strait of Hormuz, the truce appeared fragile.

Last month's increase only showed the immediate effects of the oil price shock, which has also raised the cost of diesel. March's surge underscored the affordability challenges facing consumers. Trump romped to victory in the 2024 presidential election promising to lower prices.

OIL PRICE SHOCK

Excluding the volatile food and energy components, the CPI rose 0.2% last month after climbing 0.2% in February. That translated to a year-on-year increase of 2.6% in the so-called core CPI.

The moderate rise after a 2.5% advance in February likely offers no comfort for officials at the U.S. central bank, with an acceleration expected in April as the secondary effects of the oil price shock filter through.

The Federal Reserve Bank of the U.S. tracks the Personal Consumption Expenditures price indexes for its 2% inflation target. Those measures posted strong monthly gains in February.

Both core CPI and PCE inflation have been driven by businesses passing on some of Trump's broad tariffs to consumers, offsetting the disinflationary trend in rents.

In the months ahead, economists expect the Middle East conflict to lift core prices through expensive jet fuel that will raise airline fares, and diesel, which will increase the cost of goods transported by road. Prices of fertilizer and plastics, among other goods, are also expected to rise.

Firming inflation has left some economists believing the Fed would not reduce borrowing costs this year, a conviction that was reinforced by the release on Wednesday of minutes of the central bank's March 17-18 policy meeting, which showed a growing group of policymakers last month felt that rate hikes might be needed.

The Fed left its benchmark overnight interest rate in the 3.50%-3.75% range. Some economists still see a chance of a rate cut if labor market conditions deteriorate.

Others argued that consumers pulling back as gasoline prices eroded their purchasing power could make it difficult for some businesses to pass on higher costs from oil prices.