March CPI Report: Iran War Lifts Inflation to a 2-Year High
The March CPI report, released Friday morning, showed spiking energy costs are boosting inflation. Here's what to know.
Inflation's always been top of mind for economists. But since June 2022, when the Consumer Price Index (CPI) hit its highest level in 40 years (9.1%!) and the Federal Reserve hiked interest rates to their highest level in over 20 years, it's become a major talking point for the rest of us.
This is because inflation is a measure of our purchasing power. How much things cost and how quickly prices are rising directly impact not only how far a dollar will stretch for us, but also how far it will go for the companies that we invest in. And very few things make the stock market grumpier than a disappointing profit margin.
More recently, the ongoing conflict between the U.S., Israel and Iran has caused oil prices to spike to their highest level in four years and gas prices to soar above $4.00 per gallon, putting a quick halt to the decelerating inflation trend we've seen in recent years.
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"No matter how long the Iran war goes on, the economy is bound to suffer from it," write David Payne and Matthew Housiaux of The Kiplinger Letter. "How much and how severely depends on just how long the conflict continues to crimp key energy exports. Some degree of inflation is now inevitable."
And the March CPI report showed that inflation is indeed on the rise.
March CPI, by the numbers
According to the Bureau of Labor Statistics, headline CPI rose 0.9% from February to March, and was 3.3% higher year over year. This marked the highest annual increase since May 2024.
The results came in much higher than February's figures of 0.3% and 2.4%, and exceeded economists' estimates for a 0.8% monthly increase and a 3.1% annual rise.
Rising energy costs were the main reason behind the hot headline number. "The index for energy rose 10.9 percent in March, led by a 21.2-percent increase in the index for gasoline which accounted for nearly three quarters of the monthly all items increase," explained the BLS.
Shelter costs also increased in March, as did prices for airfare, apparel, household furnishings and new vehicles.
As for the good news, costs for medical care, personal care and used cars and trucks declined.
And core CPI, which excludes volatile food and energy prices, rose 0.2% from February to March, matching economists' expectations. Year over year, core inflation came in at a slower-than-expected 2.6%.
What is CPI?
"CPI is a measure of the average price of that basket of goods and services over time," writes Kiplinger contributor Coryanne Hicks. "The specific goods and services within the CPI basket are based on information around 24,000 families and individuals give the U.S. Bureau of Labor Statistics on what they buy."
Since inflation peaked nearly four years ago, the CPI and core CPI have declined. But the March data show that headline inflation is once again on the rise.
And Payne expects another large increase in gas prices in the April CPI, considering it measures mostly mid-month data. "That should shoot the 12-month inflation rate close to 4.0%, where it should stay until gasoline prices start falling," he explains in the Kiplinger inflation outlook.
And higher inflation, Payne says, will make the Federal Reserve reluctant to cut interest rates.
So what does Wall Street think about the March CPI report? Here, we look at some of what economists, strategists and other experts have to say about the results and what they could mean for the Fed and investors going forward.
What the experts are saying about the March CPI report
"The March inflation data reflected the anticipated impact of higher oil prices on the headline print, while the core print showed a mix of softening services prices and strengthening goods prices. The headline increase marked the fastest increase in four years and should serve as a warning to the markets, as higher oil prices flow through to the core components over the next few months. The Fed is likely to monitor incoming data before making its next policy adjustment, with the bar for renewed hikes significantly higher than that for resuming rate cuts." – Ryan Weldon, Investment Director and Portfolio Manager at IFM Investors
"This may be the best headline inflation number we see for a while as it may only partially capture the full force of the Iran conflict, which sent U.S. crude and U.S. gas up 70% at peak. Wage growth has decelerated to levels consistent with the inflation target, and long-term inflation expectations remain anchored. We believe the Fed will look through the energy-driven noise so long as these factors hold. The Fed has room to be patient, and every reason to do so. Today's number buys the Fed time, but the real test lies ahead." – Alexandra Wilson-Elizondo, Global Co-CIO of Multi-Asset Solutions at Goldman Sachs Asset Management
"While the Iran conflict and closure of the Strait of Hormuz may come to a close in the near future, consumers will see price pressures on gas, energy, food and other commodities for at least the next three months, and that makes the Fed's job all the more tougher. The Fed keeps hitting detours on their path to cutting rates. Cuts are off the table for the foreseeable future. Hikes would only come if the economy is roaring on all cylinders and inflation is rising to untenable levels. The Fed has stated that it doesn't have the tools to fight supply side shocks and thus they will stick to their knitting monitoring employment and the stickier parts of inflation." – Skyler Weinand, Chief Investment Officer at Regan
"As we have been saying for the past month and a half, the duration of the war matters as does the extremely important Strait of Hormuz, because if the supply shock is temporary then the economy can weather this storm and the Fed will have an opportunity to lower interest rates by the end of the year, but if the inflation shock is more long-lasting they will have no choice but to sit on their hands for the entire year." – Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management
"Yes, we are seeing an oil-related spike in headline inflation, but core inflation remains tame. Unlike the previous spike in 2022, there is no broad-based inflationary trend in the U.S. economy and consumers do not have the cushion of pandemic savings to sustain their spending. The Fed will be loath to hike into this. If anything, the longer this conflict continues, the more aggressively the Fed will have to ease once oil prices peak out. The market understands this and you see it reflected in the performance of the Dollar and broader risk assets ever since 2-year Treasury yields peaked in late March." – Stephen Coltman, Head of Macro at 21shares
"Inflation, Iran, and upcoming earnings are all driving markets, but the relative importance keeps shifting. We think earnings and fundamentals win out. Inflation is a little hot, but reasonably stable. Iran may shift some consumption and investment patterns, but the potential demand destruction is probably not meaningful enough to matter as of now." – Scott Helfstein, Head of Investment Strategy at Global X
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