By CHRISTOPHER RUGABER AP Economics Writer
WASHINGTON (AP) — The largest monthly jump in gas prices in six decades caused a sharp spike in inflation in March, creating major challenges for the inflation-fighters at the Federal Reserve and heightening the political challenges of rising costs 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.
Excluding the volatile food and energy categories, core prices rose 2.6% in March from a year earlier, up from 2.5% in February. But last month core prices rose a modest 0.2%, suggesting that rising gas prices haven’t yet spread to many other categories.
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 and many Fed officials have said a rate hike may be needed if inflation doesn’t cool. Gas prices are also a highly visible cost that has outsize impacts on consumer confidence and political sentiment.
Higher gas prices sap consumers’ ability to spend on other goods and services and as a result could also slow economic growth. At least in the short run, many Americans can only make limited changes to their daily driving habits, which are largely determined by where they live, shop, and work. As a result, most people will pay higher prices for gas, and potentially cut back elsewhere.
Gas prices averaged $4.15 a gallon nationwide Friday, up from $2.98 on the day before the war began, according to motor club AAA.
The big question for consumers and the economy is whether the surge in oil and gas prices will create a sustained, broader inflation shock, similar to what occurred in the aftermath of the pandemic in 2021-2022. 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. The unemployment rate is low, at 4.3%, but companies aren’t scrambling to hire the way they were when the economy emerged from the pandemic, which led many firms to offer sharp pay increases to attract and keep workers.
Rapid pay increases and solid income growth helped consumers weather the higher prices that resulted from the pandemic’s supply chain disruptions, and fueled spikes in demand that led many companies to raise prices further.
“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.
Detmeister thinks the better comparison will likely be to 1990-91, when higher oil and gas prices stemming from Iraq’s invasion of Kuwait contributed to a recession, but didn’t lead to a jump in inflation, in part because of weaker consumer spending.
The gas price spike’s impact on inflation is, in some ways, similar to President Donald Trump’s tariffs, in that their effect will depend largely on the size and duration of the increase.
For now, economists expect that in March and April the impact will largely be confined to energy-intensive industries, such as airlines, package delivery services and public transportation. Overall, the U.S. economy is much less dependent on oil and gas than it was in previous decades.
Still, the large jump in inflation — which is almost certain to continue for several months — has already shifted the debate at the Federal Reserve, which began the year expecting to cut its key interest rate at least a couple of times. But a growing number of Fed officials are now willing to consider hiking rates instead if core inflation doesn’t cool noticeably.
Most officials are almost certain to support keeping the Fed’s key interest rate unchanged in the coming months, at about 3.6%, as they evaluate how the economy evolves. Investors now don’t expect the Fed to cut rates until late 2027.
Higher gas prices are tricky for the Fed because they can also slow growth by weighing on consumer spending, potentially causing layoffs. The Fed would typically cut its rate to encourage more spending if unemployment rises, while it raises rates to combat inflation.
More expensive oil and gas will also likely lift grocery prices, creating more pain for consumers who have already absorbed a roughly 25% jump in food costs since the pandemic. Nearly all groceries are shipped by diesel-fueled trucks, and diesel fuel prices have risen even more than those for regular gas. Still, analysts don’t expect food prices to accelerate for another month or two.