Inflation surges as effects of the Iran War show in prices

BY COLBY S MITH The New York Times

U.S. inflation surged in March as the energy shock stemming from the war in Iran rippled across the economy.

The consumer price index report showed that inflation jumped to 3.3% compared with the same time last year, almost a full percentage point increase from February’s annual pace. Overall prices rose 0.9% over the course of March, the highest monthly gain since the peak of the post-pandemic inflation crisis in June 2022.

"Core" inflation, which strips out volatile food and energy prices, increased modestly, however, providing some comfort to the Federal Reserve as it debates how to proceed with interest rates. This closely watched measure of underlying inflation rose to 2.6% on a year-over-year basis following a 0.2% increase in March.

The data released by the Bureau of Labor Statistics on Friday captured the period of rapidly rising commodity prices that preceded this week’s temporary ceasefire. The truce has provided some reprieve, but prices remain far higher than before the war began given its tenuous nature.

Before this week’s breakthrough, prices for Brent crude, the international oil benchmark, had shot up by roughly 50% to trade upward of $110 a barrel. It currently hovers around $95, a more than 30% premium compared with the prewar level.

Americans are now paying around 40% more for gasoline compared with late February, $4.15 per gallon on average, according to AAA. Shipping companies, food delivery services and airlines have added new surcharges and fees to cover mounting costs.

The overall energy index in the latest CPI report rose nearly 11%, led by a 21% surge in gasoline prices. That alone accounted for nearly three-quarters of the monthly increase in prices in March, according to the Bureau of Labor Statistics. Fuel oil increased at an even faster pace, by 30.7% over the month. Other motor fuels, which mostly include diesel, jumped 30.8%.

Sectors most exposed to the energy shock, such as airfares, saw a big jump in prices as well. Airfares rose 2.7% in March and were up 14.9% from a year earlier.

Grocery prices fell slightly in March, by 0.2%, but many economists expect that to soon change because of the war. Disruptions in the natural gas market have also boosted fertilizer prices, fanning fears that it will make everyday staples more expensive.

In a statement on Friday, Kush Desai, a White House spokesperson said that President Donald Trump had "always been clear about short-term disruptions" resulting from the war and was "diligently working to mitigate" them.

"As the administration ensures the free flow of energy through the Strait of Hormuz, the American economy remains on a solid trajectory thanks to the administration’s robust supply-side agenda of tax cuts, deregulation, and energy abundance," he added.

War-related price pressures risk exacerbating an inflation problem the Fed was already struggling to tame before the war broke out. Progress toward the central bank’s 2% target had essentially stalled, making officials wary about cutting interest rates again after pressing pause on reductions in January. As of February, the Fed’s preferred gauge, the personal consumption expenditures price index, rose 0.4% for the month, or 2.8% compared with the same time last year. The corresponding "core" measure now stands at 3%.

Policymakers are primarily worried that soaring energy prices will spill over into other sectors, affecting inflation in a more persistent way. Year-ahead inflation expectations, as measured by a long-running survey by the University of Michigan, rose a full percentage point in April to 4.8%, the largest one-month increase since the onslaught of tariff announcements around the same time last year. The survey, which covered the period before the ceasefire and was released Friday, also showed that long-term measures of inflation expectations, which the Fed favors, saw only a modest increase to 3.4%. Consumer sentiment hit the lowest level in the survey’s history, too.

This comes as prices paid by businesses across the services sector for materials and other inputs increased in March by the most in roughly 13 years. Input prices also surged for manufacturing companies.

The Fed is also concerned about companies opting to scale back on hiring to offset these rising costs, potentially jeopardizing the labor market. Many companies had in the last year shrunk their profit margins to manage the impact of Trump’s tariffs.

Researchers at the Fed recently concluded that tariffs explained the "entirety of excess inflation in the core goods category" compared with prepandemic inflation rates. They estimate that tariffs implemented throughout 2025 contributed to a 0.8% boost in core PCE prices.

As of March, however, the impact of tariffs was relatively muted in the latest CPI report. Furniture and bedding prices fell slightly in March, but are still up 3.1% compared with the same time last year. Appliance prices slipped 1.6% last month and are up 1.1% on a year-over-year basis.

Apparel prices, however, rose 1% last month and are up 3.4% on the year.

Housing-related costs, which the Fed has been expecting to decelerate this year, moved up by 0.3% in March. Compared with the same time last year, those prices are 3% higher.

In the face of elevated inflation, consumers have turned more cautious on spending. Higher energy bills because of the conflict risk are exacerbating that.

Without evidence that inflation is in retreat, the Fed will likely find it hard to justify cutting rates below the current 3.5% to 3.75% level. What could prompt them to act sooner, however, is if the labor market deteriorates rapidly.

Recent data suggests that the labor market is still stable, with monthly jobs growth rebounding in March and the unemployment rate ticking down to 4.3%. That resilience has prompted some economists to question how much the Fed’s policy settings had been actually weighing on economic activity, even as officials said rates were high enough to be doing so.

"The inflation process is going to be determined by whether you put policy in the right place," said Ed Al-Hussainy, an interest rate strategist at Columbia Threadneedle Investments. "There is a non-trivial possibility that policy ended up being a bit too easy at the start of the year."

Minutes from the central bank’s March meeting, released Wednesday, underscored the thorny policy decisions ahead for the Fed under these circumstances. More officials last month showed a greater openness to rate increases in the event that inflation does not ease as expected. Still, a majority of officials have not ruled out rate cuts entirely because of the risks posed to the labor market.

For now, officials argue that with rates only marginally weighing on economic activity, they are well-placed to handle either an inflation or a growth shock. That has translated to broad internal support for the Fed to extend a pause in rate cuts that began in January for now.

A driver fills up at a gas station in Manhattan on March 19. The Consumer Price Index jumped 3.3 percent in the year through March.VINCENT ALBAN — THE NEW YORK TIMES