US inflation surges as effects of the Iran war show in prices

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US 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 per cent compared to the same time in 2025, almost a full percentage point increase from February’s annual pace. Overall prices rose 0.9 per cent 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. This measure of underlying inflation rose to 2.6 per cent on a year-over-year basis following a 0.2 per cent increase in March.

The data released by the Bureau of Labor Statistics on April 10 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 per cent to trade upward of US$110 a barrel. It currently hovers around US$95, a more than 30 per cent premium compared to the prewar level.

Americans are now paying around 40 per cent more for petrol compared to late February, US$4.15 per gallon on average, according to American Automobile Association (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 per cent, led by a 21 per cent 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.

Sectors most exposed to the energy shock, such as airfares, saw a big jump in prices as well. Airfares rose 2.7 per cent in March and were up 14.9 per cent from 2025.

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

These price pressures are poised to exacerbate an inflation problem the Federal Reserve was already struggling to tame before the war broke out.

Progress towards the central bank’s 2 per cent target had essentially stalled, making officials wary about cutting interest rates again after pressing pause on reductions in January.

As at February, the Federal Reserve’s preferred gauge, the Personal Consumption Expenditures price index, rose 0.4 per cent for the month, or 2.8 per cent compared to the same time in 2025. The corresponding “core” measure now stands at 3 per cent.

Policymakers are primarily worried that soaring energy prices will spill over into other sectors, affecting inflation in a more persistent way. In March, prices paid by businesses across the services sector for materials and other inputs increased by the most in roughly 13 years. Input prices also surged for manufacturing companies.

The Federal Reserve is also concerned about companies opting to scale back on hiring to offset these rising costs, potentially jeopardising the labour market.

Many companies had in the last year shrunk their profit margins to manage the impact of US President Donald Trump’s tariffs, which have made a range of goods and services more expensive. Consumers had already turned cautious on spending before the war, data released by the Bureau of Economic Analysis showed on April 9. Higher energy bills because of the conflict risk exacerbating that.

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

Minutes from the central bank’s March meeting, released on April 8, underscored the thorny policy decisions ahead for the Federal Reserve. More officials in March showed a greater openness for 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 labour 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 Federal Reserve to extend a pause in rate cuts that began in January for now. NYTIMES