KVIG Informative

Inflation jumped to its highest level in nearly two years in March. The Iran war drove most of it. The tariffs were already there before the first shot was fired.

The Consumer Price Index rose 0.9 percent in March on a seasonally adjusted basis, the Bureau of Labor Statistics reported Friday morning. Over the past twelve months, prices are now up 3.3 percent — the highest annual inflation rate since May 2024 and a sharp jump from the 2.4 percent recorded in both January and February.

The single biggest driver was energy. The energy index rose 10.9 percent in March alone. Gasoline surged 21.2 percent in one month, accounting for nearly three-quarters of the entire monthly increase in consumer prices. The national average price of gas has now climbed above $4 per gallon for the first time in more than three years.

The cause is the U.S.-Iran war. The conflict disrupted global oil supplies, sending crude prices to their highest level in four years. Economists at Pantheon Macroeconomics called it the largest one-month jump in fuel costs since at least 1957. A two-week ceasefire announced earlier this week offered some temporary relief to oil markets, but analysts say the inflationary effects of the energy shock will take months to work through the broader economy.

Core inflation — which strips out volatile food and energy prices — rose a more modest 0.2 percent month over month and came in at 2.6 percent annually, slightly below economist expectations. That slower core reading is the one piece of good news in the report. Prices for medical care, personal care, and used vehicles all declined in March.

But the war did not arrive into a stable economy. Before the first strike, inflation was already running above the Federal Reserve’s 2 percent target, kept elevated by the continued pass-through of the Trump administration’s tariffs into consumer goods prices. The effective tariff rate currently sits around 8 percent, down from a peak of 21 percent in April 2025, but economists say the pricing effects are still filtering through supply chains. JP Morgan analysts have warned that tariffs will continue pushing food prices higher independent of whatever happens with oil.

The Federal Reserve held interest rates steady at its March meeting and is widely expected to do so again at its April 29 meeting. Some policymakers have begun discussing the possibility of a future rate hike if inflation continues accelerating. Fed minutes released Wednesday indicated the central bank sees itself on a prolonged pause until the fog of war clears. Economists at Oxford Economics project headline inflation will exceed 4 percent annually by April if energy prices do not meaningfully retreat.

For working people, the math is straightforward. Wage gains had outpaced inflation for nearly three years. That streak is now at risk. Higher gas prices raise the cost of getting to work. They raise the cost of food through transportation and production. They raise the cost of nearly everything that moves through a supply chain — which is nearly everything. The ceasefire may hold. The prices at the pump will not come down as fast as they went up. Economists call this the rockets and feathers principle. Prices rocket up during a supply shock. They feather back down slowly, if at all.