A man buys butter at a supermarket in Houston, Texas, on March 17, 2026.
Ronaldo Shemit | AFP | Getty Images
Consumer prices soared in March as the Iran war drove up energy costs and pushed the Federal Reserve further from its inflation target, according to a report from the Bureau of Labor Statistics on Friday. However, underlying inflation was relatively benign.
The consumer price index rose a seasonally adjusted 0.9% in the month, bringing annual inflation to 3.3%, driven by a 10.9% rise in energy costs. Both numbers were in line with the Dow Jones consensus. The annual rate was the highest since April 2024 and rose from 2.4% in February.
However, the rise in core prices excluding food and energy was much smaller, at just 0.2% month-on-month and 2.6% year-on-year, both 0.1 percentage points lower than expected, indicating that underlying inflation is under control. In some places, prices even fell significantly, as medical, personal care, and used cars and trucks all fell during the month.
The Iran conflict dominated monthly inflation statistics, with gasoline soaring 21.2%, accounting for nearly three-quarters of the headline price increase, according to the BLS.
Energy prices fell in April after a ceasefire between the United States and Iran that began at the end of February established a tenuous peace in the fighting. That would allow Fed officials to scrutinize March’s spike and focus more on the underlying trajectory of inflation, which has been above target for five years.
Markets were already pricing in little chance of a rate cut before the end of 2026, but Fed officials signaled at their March meeting that they were leaning toward a 0.5 percentage point cut, and the timing is highly uncertain.
Traders had little initial reaction to the news, with stock market futures rising slightly and U.S. Treasury yields mixed.
“As long as these factors persist, we believe the Fed will keep an eye on energy-derived noise,” said Alexandra Wilson Elizondo, global co-chief executive of multi-asset solutions at Goldman Sachs Asset Management. “The Fed has room for patience and every reason to do so. Today’s numbers buy the Fed some time, but the real test is yet to come.”
Policymakers are paying particular attention to service prices as a sign of underlying inflation, excluding the impact of tariffs and wars.
Services excluding energy rose 0.2% in the same month, and rose 3% compared to the same month last year. Similarly, shelters increased by 0.3% for the month and 3% for the year, the lowest level since August 2021.
Food prices were flat in the month, rising at an annualized rate of 2.7%, while household food prices fell by 0.2%. Meat prices fell by 0.6% and eggs by a further 3.4%, down 44.7% over the past year. New car prices rose only 0.1%.
There were some signs of the impact of tariffs and war, with airfares up 2.7% and clothing up 1%.
The increase in CPI caused average hourly wages to rise by only 0.2%, while workers’ real earnings fell by 0.6% in the same month. Real average hourly wages increased by 0.3% over the 12-month period.
