WASHINGTON — The largest monthly jump in gas prices in six decades caused a sharp spike in inflation last month, creating major challenges for the inflation-fighters at the Federal Reserve and heightening already substantial political hurdles for the White House.
Consumer prices rose 3.3% in March from a year earlier, the Labor Department said Friday, up sharply from just 2.4% in February and the biggest yearly increase since May 2024. On a monthly basis, prices rose 0.9% in March from February, the largest such increase in nearly four years.
It's the first read on inflation to capture the effects of the Iran war. The surge in gas prices will stretch the budgets of lower- and middle-income households as it erodes their incomes, making it harder to afford other necessities such as food and rent.
Excluding volatile food and energy, core prices rose 2.6% in March from a year earlier, up from 2.5% in February. And last month core prices rose a modest 0.2%, suggesting that rising gas prices haven't yet spread to many other categories.
A big question for now is how long the oil and gas price shock lasts and whether it will lead to a broader, long-lasting inflation boost, similar to what occurred in the spring of 2022 after Russia invaded Ukraine. For now, economists say that it is unlikely the U.S. will see a widespread increase similar to a few years ago, when inflation topped 9%.
Still, how the war and its impact on inflation will play out in the coming months remains highly uncertain. Despite a tenuous cease fire, little has changed in the Strait of Hormuz, a bottle neck where millions of barrels of oil typically pass daily.
“It’s painful in the near term,” said Michael Pearce, chief U.S. economist at Oxford Economics. “It’s going to get more painful in April,” when further gas price increases will lift inflation higher.
But Pearce said the impact may be shorter-lived than after the pandemic: “I think the conditions are much more like a short, sharp shock than what we saw in 2022.”
Industries that depend on oil and gas are paying more, particularly airlines, which have passed on those higher costs to travelers. Fares jumped 2.7% just last month and are 14.9% higher than a year ago. Many delivery services, including UPS and FedEx, have already announced fuel surcharges that have raised shipping costs for businesses and households.
Grocery prices slipped 0.2% last month and are up just 1.9% from a year earlier, yet economists believe they will move higher in the coming months as diesel fuel prices surge. Most food is shipped by truck.
More expensive fuel is “contributing to rising production costs across the food supply chain and could put upward pressure on grocery prices going forward,” said Andy Harig, a vice president at the grocery trade group FMI-The Food Industry Association. “As energy prices increase, the costs associated with producing and delivering food also rise.”
Clothing costs rose 1% in March from the previous month and are up 3.4% from a year earlier. Used car prices, however, fell 0.4% last month and down 3.2% from a year earlier.
The gas price shock stemming from the Iran war has shifted inflation’s trajectory, from a slow, gradual decline to a sharp increase further away from the Fed’s 2% target. As a result, the central bank will almost certainly postpone any cut in interest rates for months. Many Fed officials will look past the increase in headline inflation, however, and focus on core prices, which are likely to rise more slowly.
If Americans cut back on spending elsewhere in response to more expensive gas, the economy could slow and unemployment may rise.
Consumer sentiment plunged to a record low in April, according to a survey released Friday by the University of Michigan, largely because of the Iran war and concerns over higher gas prices. Their Index of Consumer Sentiment fell to 47.6, from 53.3 in March.
“Many consumers blame the Iran conflict for unfavorable changes to the economy,” said Joanne Hsu, the university's director of consumer surveys.
High prices had angered American voters before the war and the spike in prices for oil and everything that entails, from the pump to the grocery store, could make it more difficult for the president's party to hold on to seats in both the House and the Senate in next year's midterms.
Polling by the Associated Press-NORC Center for Public Affairs Research last month found that about six in 10 Republicans are at least "somewhat" concerned about affording gas in the next few months.
Kyle LaFond, the founder of American Provenance, a small manufacturer of personal care products near Madison, Wisconsin, said his shipping costs have already risen between 30% and 40%.
The increases follow tariffs that were also a significant expense, because the company imports coconut oil, shea butter, cocoa butter, and other ingredients. LaFond said he absorbed tariff costs for months, but finally threw in the towel last September and raised prices by 20% to 30% across the board, the first price hike from the company since 2021.
Now, LaFond feels like it’s a repeat of the tariff experience. He is trying to avoid raising prices again, but it depends on how long the fuel price spike lasts. If it continues until early summer, he may have to raise prices again.
“I’d really hate to do that because that would be two years of consecutive price increases, which for us, we’ve never done that before,” he said “But for the business to survive, then that might be necessary.”
Gas prices averaged $4.15 a gallon nationwide Friday, up from $2.98 on the day before the war began and a hike of nearly 40%, according to motor club AAA.
Inflation reached a peak of 9.1% in June 2022, as COVID-19 snarled supply chains and several rounds of stimulus checks pushed up consumer demand. Prices soared for groceries, furniture, restaurant meals and many other goods and services.
This time, economists say the job market and consumer spending are weaker, and there are no large government stimulus checks being issued to spur demand.
“That’s where this really differs, is that we aren’t seeing anywhere near the strength of demand,” Alan Detmeister, an economist at UBS, said. In 2021 and 2022, income growth “was increasing really strongly. We aren't seeing that now,” he added.
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