Inflation Gauge Jumps as Iran War Drives Gas Prices

A key inflation measure rose sharply in March as gas prices soared due to the Iran war, pushing up living costs and delaying potential interest rate cuts by the Federal Reserve.

According to multiple reports, the inflation gauge monitored by the Fed increased 0.7% from February, with annual prices rising 3.5%, the largest increase in nearly three years. Core inflation, excluding food and energy, rose 0.3% monthly and 3.2% annually.

The surge in gas prices has moved inflation further away from the Fed's 2% target. Outgoing Fed Chair Jerome Powell indicated that the central bank would likely remain on hold for months as it assesses the impact of the Iran war. The Fed has kept its key short-term interest rate unchanged after three cuts last year.

Americans' incomes, including wages and government benefits, increased 0.6%, but this was slower than the inflation rate. Higher gas prices are expected to reduce spending on other products and services, potentially slowing economic growth. Consumers have been supported by tax refunds from last year's tax cut legislation, but these benefits are being offset by higher fuel costs.

Joe Brusuelas, chief economist at RSM, noted that the war has altered the expected growth path for the year. He now expects the economy to expand just 1.7% this year, down from an earlier estimate of 2.4%. Gas prices jumped nearly 21% in March, while grocery prices slipped slightly and clothing costs climbed.

The average price of gas nationwide reached $4.30 a gallon on Thursday, up from $2.98 before the war began. U.S. oil prices cooled slightly but remained above $105 per barrel. Consumer spending rose 0.9% last month, with inflation-adjusted spending also showing resilience.

The economy expanded at a modest 2% annual rate in the first quarter, up from 0.5% in the final quarter of last year when growth was hindered by a government shutdown. However, consumer spending growth slowed compared to the previous quarter.