US inflation soared in March amid the US-Israel war with Iran, with prices up 0.9% compared with last month and 3.3% over the year, according to new data released on Friday.
The spike in the consumer price index (CPI), which measures the price of a basket of goods and services, is the largest in nearly two years and the first official measure of how the conflict has affected US consumer prices, particularly as Iran blocked the strait of Hormuz, through which a fifth of the world’s oil and gas would typically pass.
The index for energy rose 10.9% in March, led by a 21.2% increase in the index for gasoline which accounted for nearly three-quarters of the monthly all items increase. Airfares rose 2.7% in March and were 14.9% higher than a year earlier.
Core inflation – which strips out volatile food and energy prices – rose at a more modest 0.2% over the month and was 2.6% higher over the year.
The annualized inflation rate has not pushed past 3% since summer 2024, when inflation was finally cooling after reaching a generational high of 9.1% in June 2022.
A line chart showing latest inflation figures
The war on Iran has driven the American economy into deeper uncertainty, adding to a precariousness that first came with Donald Trump’s tariffs last year. Inflation reached a four-year low last April, when price increases dropped to 2.3%. It rose to 3% by September, before coming back down to 2.4% in January and February.
Oil prices dropped after Trump announced a two-week ceasefire with Iran, which agreed to reopen the strait during the ceasefire period, but oil prices still remain high. Even after the agreement was announced, US crude oil was still priced 10% higher than before the conflict and nearly 30% higher since the start of the year.
Recent data shows prices are also affecting producers. Gross domestic product (GDP), which measures all final goods produced in the US, for the last quarter of 2025 was revised down on Thursday from an initial 1.4% to 0.5%. And the prices index in the Institute for Supply Management’s survey of managers saw its largest one-month increase in 13 years, rising from 63 in February to 70.7 in March.
Consumer confidence is also falling. The University of Michigan’s closely-watched consumer confidence survey was also released on Friday and recorded a 10.7% drop to its lowest level on record. Survey director Joanne Hsu said comments “show that many consumers blame the Iran conflict for unfavorable changes to the economy.”
Though the conflict has hit prices and confidence, the labor market appeared resilient: Employers added 178,000 jobs in March while the unemployment rate fell to 4.3%.
Strength in the labor market, combined with rising prices, puts officials at the US Federal Reserve in a tricky situation as they consider how to adjust interest rates amid the conflict. Raising interest rates could help inflation at the risk of destabilizing the labor market and increasing unemployment.
a line chart showing gasoline prices
Minutes from the Fed board’s last meeting in February, released on Wednesday, mentioned “many participants” seem to be worried about the impact of prolonged inflation, “which could call for rate increases”.
The Fed went on a long interest rate hike campaign after inflation soared in 2022, bringing rates from near zero to a 20-year high range of 5.25% to 5.5% in 2024. Rates currently sit at a range of 3.5% to 3.75%.
In a note to investors, Bernard Yaros, lead US economist at Oxford Economics, wrote: “The Federal Reserve will look past the energy supply shock as a onetime boost to inflation and will watch for any weakening in the job market, which is usually hurt by energy shocks with a lag.”
But he warned that the next CPI report will “also be uncomfortably strong. Pump prices have continued to rise this month and will deliver another boost to inflation. A statistical quirk associated with the government shutdown will unwind, adding another unusual source of upward pressure to the April CPI. Also, the energy price shock will increasingly bleed into food and other core prices.”
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