According to the latest Consumer Price Index (CPI) report, the U.S.-Israel war on Iran drove up monthly U.S. inflation threefold in March, with the annual rate reaching 3.3%, up from 2.4% in February.
The monthly rate measured 0.9%, according to the Bureau of Labor Statistics. Gasoline prices rose by a record 21.2% last month.
CPI measures the price of a basket of goods and services and the recent spike is the largest in nearly two years and the first official measure of how the conflict has impacted US consumer prices.
The energy index rose 10.9% in March, led by a 21.2% increase in the index for gasoline, accounting for nearly three quarters of the monthly all items increase.
Airfares rose 2.7% in March and were 14.9% higher than a year earlier.
“President Trump has always been clear about short-term disruptions as a result of Operation Epic Fury, disruptions that the Administration has been diligently working to mitigate. Although gas and energy prices are seeing volatility, prices of eggs, beef, prescription drugs, dairy, and other household essentials are falling or remain stable thanks to President Trump’s policies,” Kush Desai, Special Assistant to the President, said in a tweet.
Core inflation rose at 0.2% over the month and was 2.6% higher over the year. The annualized inflation rate has not increased past 3% since summer 2024, when inflation started decreasing after reaching a generational high of 9.1% in June 2022.
The war on Iran has plunged the American economy into deeper uncertainty, following the precariousness that first came with Trump’s tariffs last year.
Following the announcement of a two-week ceasefire with Iran, oil prices dropped as Iran agreed to reopen the strait during the ceasefire period, but oil prices still remain high.
Crude oil was still priced 10% higher than before the conflict and nearly 30% higher since the start of the year.
The country’s GDP for the last quarter of 2025 was revised down on Thursday from an initial 1.4% to 0.5% as prices impact producers.
While the war impacted prices, the labor market remained seemingly resilient as employers added 178,000 jobs in March while the unemployment rate fell 4.3%.
A strengthened labor market, combined with rising prices, put Feds in a tricky situation as they consider how to adjust interest rates amid the conflict.
Raising interest rates could help inflation at the risk of destabilizing the labor market and increasing unemployment.
February’s minutes from the Fed board released on Wednesday mentioned “many participants” seem to be worried about the impact of prolonged inflation, “which could call for rate increases.”
Minutes from the Fed board’s last meeting in February, released on Wednesday, mentioned “many participants” seem to be worried about the impact of prolonged inflation, “which could call for rate increases.”
After inflation soared in 2022, the Fed went on a long interest rate hike campaign, bringing rates from near zero to a 20-year high range of 5.25% to 5.5% in 2024.
Currently, rates sit at a range of 3.5% to 3.75%.
In a note to investors, Bernard Yaros, lead US economist at Oxford Economics, wrote: “The Federal Reserve will look past the energy supply shock as a onetime boost to inflation and will watch for any weakening in the job market, which is usually hurt by energy shocks with a lag.”
Yaros warned that the next CPI report will “also be uncomfortably strong. Pump prices have continued to rise this month and will deliver another boost to inflation. A statistical quirk associated with the government shutdown will unwind, adding another unusual source of upward pressure to the April CPI. Also, the energy price shock will increasingly bleed into food and other core prices.”
