US Stock Market: US inflation jumps as war-driven fuel costs complicate Fed outlook

U.S. inflation picked up sharply in March, driven largely by a surge in gasoline prices amid the ongoing Iran conflict, according to data reported by Reuters. The rise in prices has reinforced expectations across financial markets that the Federal Reserve may keep interest rates elevated for a longer period, potentially stretching well into next year.

Data from the Commerce Department’s Bureau of Economic Analysis, cited by Reuters, showed that the personal consumption expenditures (PCE) price index rose 0.7% in March, marking the steepest monthly increase since June 2022. This followed a 0.4% gain in February and was broadly in line with economists’ expectations.

On an annual basis, inflation accelerated significantly. The PCE index climbed 3.5% in the 12 months through March, the highest reading since May 2023, compared with 2.8% in February. The figures were also included in the government’s advance estimate of first-quarter GDP, offering an early indication of broader economic trends.

The latest data releases come after a period of disruption caused by last year’s government shutdown, with the Bureau of Economic Analysis now largely caught up on its reporting schedule.

Rising energy costs played a central role in the inflation spike. The average gasoline prices jumped 24.1% in March, based on data from the U.S. Energy Information Administration. Fuel prices have continued their upward climb into April, reaching their highest levels in nearly four years.

Even before the escalation in geopolitical tensions, inflationary pressures had been building, partly due to sweeping import tariffs introduced under President Donald Trump.

Core inflation, which strips out volatile food and energy components, showed more moderate movement. The core PCE index rose 0.3% in March, following a 0.4% increase in February. On a yearly basis, core inflation held steady at 3.2%, indicating persistent underlying price pressures.The Federal Reserve, which uses the PCE index as its preferred inflation gauge, maintained its benchmark interest rate in the 3.50%–3.75% range at its latest policy meeting. The central bank cited rising inflation risks linked to the conflict as a key factor behind its cautious stance.

Consumer spending showed resilience in nominal terms, rising 0.9% in March after a 0.6% increase in February. However, when adjusted for inflation, the gain was far more modest at 0.2%, suggesting that higher prices are beginning to weigh on real consumption.

With consumption accounting for more than two-thirds of U.S. economic activity, the slowdown in real spending points to a softer growth trajectory heading into the second quarter. Economists expect the economic impact of the conflict and elevated inflation to become more pronounced in the months ahead.