Surging gas prices pushed inflation to its highest level in two years last month as the war with Iran sent gas prices spiraling.
The annual rate of inflation hit 3.3%, led by a 21.2% increase for gasoline — the largest one-month increase at the pump since 1967. Between February and March, overall inflation climbed 0.9%.
Gasoline prices surged to their highest levels since the Covid-19 pandemic last month, while diesel and jet-fuel prices set records. Despite a two-week ceasefire announced Tuesday, those prices have yet to meaningfully decline. On Friday, AAA reported gas prices averaged $4.15 a gallon, $0.02 less than the $4.17 seen a day earlier.
Friday’s report comes amid broader concerns about the longer-term impact of the U.S. conflict with Iran.
Companies from Amazon to airlines have announced fuel surcharges to deal with the soaring costs, and many of those fees are unlikely to revert to pre-war levels. The full economic impact of the conflict has still likely yet to be felt as global markets continue to grapple with shortages of key commodities out of the Middle East.
“We have to understand that it will take months for the higher energy prices, along with plastics, packaging, etc… to flow into the core rate,” Peter Boockvar, chief investment officer at One Point BFG Wealth Partners financial group and author of a widely read financial report, said in a note Friday.
But households are already feeling the bite. With average hourly earnings increasing just 0.2% on the month, inflation-adjusted pay fell 0.6% in March, the Bureau of Labor Statistics said Friday in a separate report. Consumer outlook fell to a record low in early April, according to the University of Michigan Survey of Consumer Expectations.
“Inflation is almost eating up the entirety of Americans’ wage gains already,” Heather Long, chief economist at Navy Federal Credit Union, said in a note. “It will almost certainly mean inflation is above wages by April or May. That is painful. That means many Americans truly are under pressure financially and having to make tough decisions about what to buy and what to skip.”
Beyond energy prices, however, the data showed signs that inflation elsewhere in the economy was slowing. The so-called core reading, which excludes energy and food prices, rose just 0.2%. Medical care services saw no increase in prices on the month, while used car prices declined.
The White House cheered other items in the report showing declining prices for various consumer items. White House spokesman Kush Desai noted on social media that egg prices had declined 44% since last March, while prices for sports tickets, butter, televisions and used cars also saw meaningful drop-offs.
“President Trump has always been clear about short-term disruptions as a result of Operation Epic Fury, disruptions that the Administration has been diligently working to mitigate,” he wrote. “Although gas and energy prices are seeing volatility, prices of eggs, beef, prescription drugs, dairy, and other household essentials are falling or remain stable thanks to President Trump’s policies.”
Some analysts said Friday they believe that softness in the core reading will give the Federal Reserve room to cut interest rates later in the year to support the labor market, assuming the war’s ultimate impact on the economy proves mostly transitory.
“As long as long-run inflation expectations remain well anchored, we still think the Fed will step in later this year and cut interest rates twice to shore up the labor market in the face of this energy supply shock,” Bernard Yaros, lead U.S. economist at Oxford Economics research group, said in a note Friday morning. “A key wildcard in the outlook for both inflation and monetary policy is the duration and intensity of the Iran war, which still hasn’t been resolved by the tenuous ceasefire.”
