The Bureau of Labor Statistics released the March Consumer Price Index data on Friday morning, and the numbers tell a story that Americans have been feeling at the pump for six weeks: the Iran war has driven US inflation to its highest level in nearly two years, powered almost entirely by an unprecedented spike in energy costs.
The good news — and there is some — is that the underlying inflation picture, stripped of energy, remains relatively contained. The bad news is that energy shocks historically take months to fully work through an economy, and economists are warning the worst may still be ahead.
The Headline Numbers
The consumer price index increased a seasonally adjusted 0.9 percent for the month, putting the annual inflation rate at 3.3 percent — pushed by a 10.9 percent surge in energy costs. The annual rate was the highest since May 2024 and up sharply from 2.4 percent in February.
However, excluding food and energy, core prices rose much less — just 0.2 percent for the month and 2.6 percent from a year ago, both slightly below forecast, indicating that underlying inflation remained contained.
The CPI data shows energy prices, driven by a spike in gasoline costs, rose 10.9 percent from the month prior. Brent crude, which was trading at $73 a barrel before the war started on February 28, traded at $95.88 as of Friday morning. Consumers got hit with higher prices at the pump last month, with gas prices rising 21.2 percent from February.
The Bureau of Labor Statistics said the 21.2 percent monthly gasoline increase represents the largest monthly increase since it began tracking the data in 1967. US gasoline prices have soared nearly 40 percent since the conflict erupted, reaching $4.15 a gallon on Friday, according to AAA.
What Drove the Spike
The story of March inflation is almost entirely an energy story. The energy index rose 10.9 percent in March, led by the 21.2 percent increase in the index for gasoline, which accounted for nearly three-quarters of the monthly all-items increase.
Sharply rising gas and energy prices were the biggest contributor to March’s jump in inflation. “There’s been bigger energy price shocks in total, but they’ve rippled through over several months,” Samuel Tombs, chief US economist at Pantheon Macroeconomics, said. “This just came through in one month.”
Beyond gasoline, the war’s fingerprints are visible across the economy. American Airlines, Delta, JetBlue, Southwest, and United Airlines have all raised checked baggage prices to offset higher energy costs. Airline fares jumped 2.7 percent. Apparel climbed 1 percent, reflecting higher transportation costs.
There were pockets of outright price declines: medical care, personal care, and used cars and trucks all fell during the month. The surge in the CPI meant that real earnings for workers decreased 0.6 percent for the month, as average hourly earnings rose just 0.2 percent.
The Good News: Core Inflation Held
The most reassuring element of the March report is that core inflation — the measure that excludes volatile food and energy prices — came in lower than expected.
Excluding food and energy, core prices rose just 0.2 percent for the month and 2.6 percent from a year ago, both 0.1 percentage point below forecast. Food prices were unchanged for the month and up 2.7 percent annually, with food at home falling 0.2 percent.
Meat prices declined 0.6 percent while eggs fell another 3.4 percent and have tumbled 44.7 percent over the past year. Shelter was up 0.3 percent monthly and 3.0 percent annually, tied for its lowest level since August 2021.
Chris Zaccarelli, chief investment officer for Northlight Asset Management, said this should “give the economy some room to absorb the higher energy price shock.” Raymond James chief economist Eugenio Aleman noted that “as long as the increase in gasoline prices is not translating into an increase in the core measures of inflation, the Fed is probably not going to react to the noise in the headline measures.”What the Federal Reserve Does Next
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 percent. It also pencilled in one rate cut for 2026. Markets had already been pricing little chance of a rate cut through the rest of 2026 given the war’s impact. Goldman Sachs Asset Management said: “We believe the Fed will look through the energy-driven noise so long as these factors hold.”
Federal Reserve Chair Jerome Powell had said at the March meeting he was not worried about stagflation: “I would reserve the term stagflation for a much more serious set of circumstances. That is not the situation we’re in.” Energy prices have moderated in April since the ceasefire between the US and Iran, which could allow Fed officials to look through the March spike and concentrate on the underlying path of inflation.
What Comes Next
EY-Parthenon chief economist Gregory Daco forecasted “an energy- and food-driven bump to push headline CPI inflation to 3.6 percent in April-May, with core CPI temporarily rising toward 2.9 percent in May-June.” He raised his December 2026 forecast to 3.0 percent year-over-year for headline CPI inflation.
A key wildcard in the outlook for both inflation and monetary policy is the duration and intensity of the Iran war, which has not been resolved by the tenuous ceasefire. “The energy price shock will take many months to play out to other parts of the economy,” Tombs said. “Goods prices won’t change immediately, but after three to six months, you tend to see energy price changes filter through to consumers.”
The March CPI report is, in effect, the opening bill for a war whose full economic cost will arrive in the data over the months ahead. The ceasefire may have stopped the fighting. But the receipts are still coming in.
