Iran conflict triggers energy inflation! US CPI in March posts the largest increase in nearly four years, while expectations for interest rate cuts cool off.

The conflict in Iran has led to a surge in gasoline prices, and the transmission effects of tariffs continue to exist. The US Consumer Price Index (CPI) saw the largest increase in nearly four years in March, further reducing the possibility of interest rate cuts this year. The US Department of Labor's Bureau of Labor Statistics announced on Friday that the CPI jumped 0.9% last month, the largest increase since June 2022 when prices surged due to the Russia-Ukraine conflict. In contrast, the CPI increased by 0.3% in February, with economists expecting a 0.9% increase. Year-on-year, the March CPI rose by 3.3%, the fastest pace since 2024, surpassing the 3% annualized inflation rate for the first time since the summer of 2024, higher than February's 2.4%, and above economists' expectations of 3.3%. Before this inflation surge, strong job growth rebounded in the US in March, indicating that the labor market remains robust. However, concerns in the market about long-term conflicts in the Middle East could weaken the labor market, especially if families reduce spending due to high prices. The conflict between the US and Iran has caused global oil prices to surge by more than 30%, with the average retail gasoline price in the US surpassing $4 per gallon for the first time in over three years. Despite Trump announcing a two-week ceasefire agreement on Tuesday, conditioned on Iran reopening the Strait of Hormuz, the ceasefire agreement appears fragile. The US Bureau of Labor Statistics stated that the record increase in gasoline prices accounted for nearly three-quarters of the monthly CPI increase. These data highlight how Middle East conflicts are rapidly affecting the US economy, exacerbating the price pressures many families have faced in recent years. Americans have felt the burden of rising gas prices at the pump, and service providers such as Delta Air Lines, Inc. and the US Postal Service have warned of future price increases. Even if the US-Iran ceasefire agreement holds and the conflict is quickly resolved, economists predict that prices may remain high in the short term as oil production returns to normal. In addition to energy shocks, disruptions in fertilizer supply are expected to eventually push up grocery prices, and rising transportation costs could affect various consumer goods. Secondary effects of oil price shocks are likely to become apparent. Excluding the more volatile food and energy components, the core CPI rose by 0.2% in March, flat compared to February; it increased by 2.6% year-on-year, slightly higher than February's 2.5%. Nevertheless, this moderate increase may not reassure Federal Reserve officials as the secondary effects of oil price shocks gradually transmit, and inflation is expected to accelerate further in April. The Federal Reserve targets a 2% inflation rate based on the Personal Consumption Expenditures Price Index (PCE). In February, related PCE indicators recorded strong monthly increases. Looking at goods and services separately, in March, consumer prices excluding energy after food rose relatively moderately. Excluding food and energy, the prices of goods closely watched by economists and policy makers for the impact of President Trump's tariffs, increased by 0.1% for the second consecutive month. Used car prices continued to decline for the fourth consecutive month. Food grocery prices fell by 0.2% month-on-month due to the decline in meat, dairy, and egg prices. Research institutions estimate that the impact of rising fertilizer costs on the CPI may take up to a year to materialize. In March, service costs excluding energy rose by 0.2%. Due to some consumers' concerns about war raising aviation fuel prices and the rush to lock in prices before ticket prices rise further, airline ticket prices rose by 2.7% month-on-month. United Airlines recently warned that, due to the oil price shock, the company may have to raise ticket prices by 20%. Another service price index closely monitored by Federal Reserve officials, excluding housing and energy costs, also rose by 0.2%, marking the lowest increase so far this year. Housing prices, which account for the largest share of the CPI, rose by 0.3% month-on-month. Medical service prices remained stable, while the prices of "other personal services," including haircuts, recorded the largest decline on record. Sports event ticket prices fell by more than 10%. Federal Reserve officials are closely monitoring the impact of oil price shocks and broader conflicts on prices. Futures markets indicate that in the context of renewed inflation risks, investors believe that the likelihood of another interest rate cut in 2026 is low, although many economists still maintain predictions of one or more rate cuts this year. Central bank officials are also paying attention to wage growth, as this helps assess consumer spending, the main engine of the economy. Another report released on Friday, combining inflation data with recent wage data, showed that real average hourly wages increased by only 0.3% year-on-year, the smallest increase since 2023. Economists have lowered their economic growth forecasts for this year, as they expect rising prices and a weak labor market to drag down consumer spending. Government data released this week showed that adjusted for inflation, spending in February almost stagnated, continuing the trend of weak demand.