US consumer prices surge in March in line with expectations

US consumer prices increased by the most in nearly four years in March as the war with Iran boosted oil prices and the pass-through from tariffs persisted, further diminishing chances for an interest rate cut this year.

The Consumer Price Index jumped 0.9 percent last month, the Labor Department’s Bureau of Labor Statistics said on Friday, the largest increase since June 2022, when prices soared in response to the Russia-Ukraine war. Consumer prices rose 0.3 percent in February.

In the 12 months through March, the CPI advanced 3.3 percent after rising 2.4 percent in February.

Economists polled by Reuters had forecast the CPI accelerating 0.9 percent and increasing 3.3 percent on a year-over-year basis. The jump in consumer inflation followed in the wake of a sharp rebound in job growth last month, which suggested the labor market remained stable.

There are, however, concerns that a prolonged conflict in the Middle East could undercut the labor market, especially if households respond to high prices by pulling back spending.

The US-Israeli war with Iran has sent global crude oil prices surging more than 30 percent, with the national average retail gasoline price breaking above US$4 (HK$31.3) a gallon for the first time in more than three years. Though President Donald Trump on Tuesday announced a two-week ceasefire on the condition that Tehran reopen the Strait of Hormuz, the truce appeared fragile.

Last month’s increase only showed the immediate effects of the oil price shock, which has also raised the cost of diesel.

March’s surge underscored the affordability challenges facing consumers. Trump won the 2024 presidential election on a promise to lower prices.

SECONDARY EFFECTS OF OIL PRICE SHOCK EXPECTED

Excluding the volatile food and energy components, the CPI rose 0.2 percent last month after climbing 0.2 percent in February. That translated to a year-on-year increase of 2.6 percent in the so-called core CPI.

The moderate rise after a 2.5 percent advance in February likely offers no comfort for officials at the US central bank, with an acceleration expected in April as the secondary effects of the oil price shock filter through.

The Fed tracks the Personal Consumption Expenditures price indexes for its 2 percent inflation target. Those measures posted strong monthly gains in February.

Both core CPI and PCE inflation have been driven by businesses passing on some of Trump’s broad tariffs to consumers, offsetting the disinflationary trend in rents.

In the months ahead, economists expect the Middle East conflict to lift core prices through expensive jet fuel that will raise airline fares, and diesel, which will increase the cost of goods transported by road. Prices of fertilizer and plastics, among other goods, are also expected to rise.

Firming inflation has left some economists believing the Fed would not reduce borrowing costs this year, a conviction that was reinforced by the release on Wednesday of minutes of the central bank’s March 17-18 policy meeting, which showed a growing group of policymakers last month felt that rate hikes might be needed.

The Fed left its benchmark overnight interest rate in the 3.50 percent-3.75 percent range. Some economists still see a chance of a rate cut if labor market conditions deteriorate. Others argued that consumers pulling back as gasoline prices eroded their purchasing power could make it difficult for some businesses to pass on higher costs from oil prices.

Reuters