WASHINGTON — U.S. consumer prices increased by the most in nearly four years in March as the war with Iran led to a record surge in the cost of gasoline and diesel, dealing a blow to President Donald Trump whose approval ratings have been falling because of unhappiness over his handling of the economy.
Though the Consumer Price Index report from the Labor Department on Friday showed an underlying measure of inflation that excludes the volatile food and energy components rising moderately last month, economists said that was because March’s data only captured the immediate effects of the oil price shock.
As such, the benign so-called core CPI readings would offer no comfort to officials at the Federal Reserve and did not change economists’ expectations that the U.S. central bank would most likely not cut interest rates this year. The report followed in the wake of a sharp rebound in job growth last month, which suggested the labor market remained stable.
“The economy has just taken a direct inflation hit as a result of the war in the Middle East,” said Christopher Rupkey, chief economist at FWDBONDS. “Every recession since the ‘70s has been preceded by an energy price shock, and if consumers thought there was a cost-of-living crisis before, get ready, as you haven’t seen nothing yet.”
The Consumer Price Index jumped 0.9% last month, the Labor Department’s Bureau of Labor Statistics said, the largest increase since June 2022 when prices soared in response to the Russia-Ukraine war. Consumer prices rose 0.3% in February.
A record 21.2% jump in gasoline prices accounted for nearly three quarters of the monthly increase in the CPI. Other motor fuels, which include diesel, soared 30.8%, the largest rise since the government started tracking the series.
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 Trump on Tuesday announced a two-week ceasefire on the condition that Tehran reopen the Strait of Hormuz, the truce appeared fragile.
In the 12 months through March, the CPI advanced 3.3% after rising 2.4% in February.
Economists polled by Reuters had forecast the CPI accelerating 0.9% and increasing 3.3% year-on-year. 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.
March’s surge underscored the affordability challenges facing consumers. Trump romped to victory in the 2024 presidential election promising to lower prices. Food prices were unchanged after rising 0.4% in February.
Stocks on Wall Street were higher. The dollar fell against a basket of currencies. U.S. Treasury yields rose.
Secondary effects of oil price shock expected
Excluding the volatile food and energy components, the CPI rose 0.2% last month after climbing 0.2% in February. Increases in rents, airline fares as well as apparel and household furnishings and operations because of tariffs were blunted by a decline in the prices of used cars and trucks.
That translated to a year-on-year increase of 2.6% in the 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 Fed 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.
Story by Lucia Mutikani.
