US inflation soars in March as war on Iran drives economy into uncertainty

US inflation accelerated in March amid the US-Israel war with Iran, with consumer prices rising 0.9% from the previous month and 3.3% from a year earlier, according to data released Friday.

The increase in the consumer price index (CPI), which tracks the cost of a basket of goods and services, was the largest in nearly two years and marked the first official read on how the conflict is affecting US consumer prices. The report points to Iran’s blockade of the Strait of Hormuz, through which about a fifth of the world’s oil and gas typically passes.

Energy drives the monthly jump

The energy index rose 10.9% in March. The gasoline index increased 21.2%, accounting for nearly three quarters of the monthly rise in the “all items” CPI. Airfares also climbed, up 2.7% in March and 14.9% higher than a year earlier.

Core inflation, which excludes volatile food and energy prices, increased 0.2% over the month and was up 2.6% year over year.

Inflation trajectory and recent context

The annualized inflation rate has not exceeded 3% since summer 2024, when inflation was cooling after reaching a generational high of 9.1% in June 2022. Inflation fell to 2.3% last April, rose to 3% by September, and then eased to 2.4% in January and February.

Conflict-related price pressures and oil market impact

The war has increased uncertainty for the US economy, adding to pressures that began with Donald Trump’s tariffs last year. Oil prices fell after Trump announced a two-week ceasefire with Iran, during which Iran agreed to reopen the Strait of Hormuz. Even so, oil prices remain elevated: US crude was still priced 10% higher than before the conflict and nearly 30% higher than at the start of the year.

Broader economic signals: producers and business surveys

Price pressures are also showing up in producer and business data. Gross domestic product (GDP) for the last quarter of 2025 was revised down on Thursday from an initial 1.4% to 0.5%. In addition, the prices index in the Institute for Supply Management’s survey of managers posted its largest one-month increase in 13 years, rising from 63 in February to 70.7 in March.

Labor market resilience complicates policy outlook

Despite the inflation surge, the labor market appeared resilient. Employers added 178,000 jobs in March, and the unemployment rate fell to 4.3%.

With rising prices alongside a still-strong labor market, US Federal Reserve officials face a difficult trade-off as they consider interest-rate adjustments. Raising rates could help reduce inflation but also risks destabilizing employment and increasing unemployment.

Fed communications and economist view

Minutes from the Fed board’s last meeting in February, released on Wednesday, said “many participants” were concerned about the impact of prolonged inflation, which “could call for rate increases.”

The Fed has been on a long interest-rate hike campaign since inflation surged in 2022, lifting rates from near zero to a 20-year high range of 5.25% to 5.5% in 2024. Rates currently stand at 3.5% to 3.75%.

In a note to investors, Bernard Yaros, lead US economist at Oxford Economics, wrote that the Federal Reserve will “look past the energy supply shock as a onetime boost to inflation” and will focus on whether the job market weakens, noting that job impacts from energy shocks typically arrive with a lag. He also warned that the next CPI report may be “uncomfortably strong,” citing continued increases in pump prices, an April CPI upward effect tied to a statistical quirk related to the government shutdown, and the likelihood that the energy price shock will increasingly spill into food and other core prices.