Inflation climbs to 3.3% in March, driven by energy prices, complicating the Fed's inflation target

Inflation rose sharply in March, with higher energy costs linked to the Iran conflict pushing the Federal Reserve farther from its inflation target.

March CPI: headline inflation accelerates

In the report released on April 10, the consumer price index (CPI) increased 0.9% month over month in March and 3.3% year over year. The rise was driven mainly by energy prices, which climbed 10.9%. Both the headline figures were in line with Dow Jones forecasts.

Core inflation—excluding food and energy—rose 0.2% month over month and 2.6% year over year, slightly below forecasts by 0.1 percentage point. The data suggested core goods inflation remains contained, with declines in some categories during the month, including healthcare, personal care, and used cars and trucks.

Iran conflict and energy costs drive the increase

The Iran conflict was the main driver of the month’s inflation profile. Gasoline prices surged 21.2%, accounting for nearly three-quarters of the overall increase in the price index, according to the Bureau of Labor Statistics (BLS).

Energy prices were expected to cool in April after the United States and Iran reached a ceasefire, creating a fragile peace for the conflict that began in late February. In that context, the Fed could “look past” the sharp March rise and focus more on the underlying trend in core inflation, which has remained above the 2% target for the past five years.

Policy expectations and market reaction

Markets had previously priced in a very low probability of the Fed cutting rates for the remainder of 2026. At the March meeting, Fed officials leaned toward a 25-basis-point cut, though the timing remains uncertain.

Traders reacted modestly to the report, with stock index futures rising slightly and Treasury yields trading mixed.

“We believe the Fed will ignore energy-driven noise. The Fed has room to be patient, and there are many reasons to do so. Today's data buys the Fed more time, but the real challenges lie ahead,” said Alexandra Wilson-Elizondo, Global Co-Chief Investment Officer for multi-asset solutions at Goldman Sachs Asset Management.

Services, shelter, and food: mixed but contained

Services prices (excluding energy) rose 0.2% from the prior month and 3% from a year earlier. Shelter costs increased 0.3% month over month and 3% year over year, the lowest since August 2021.

Food prices were unchanged for the month and rose 2.7% year over year. Groceries fell 0.2%. Meat prices declined 0.6%, while eggs fell another 3.4% and were down 44.7% over the past year. New car prices increased by only 0.1%.

There were also signs that tariffs and the war are affecting specific categories: airfares rose 2.7% and clothing prices rose 1%.

Real wages decline

The sharp CPI rise reduced workers’ real wages by 0.6% for the month, as average hourly earnings rose only 0.2%. Over 12 months, real hourly earnings increased 0.3%.