US-Iran War Ignites Energy Inflation, US March CPI Rises 3.3% Year-on-Year, Fed Rate Cut Window Nearing Closure?

TradingKey - The energy price shockwaves triggered by the U.S.-Iran conflict are profoundly impacting the U.S. economy.

Latest Consumer Price Index (CPI) data for March released by the U.S. Bureau of Labor Statistics shows the CPI surged 0.9% month-on-month, while the year-on-year increase climbed to 3.3%, the highest level seen in 2024. Although core inflation remains temporarily moderate, secondary pass-through effects from the energy shock are gathering momentum.

Energy Prices Drive Inflation Surge

The immediate driver of this inflation surge is the spike in energy prices. Since the escalation of the U.S.-Iran conflict in late February, global crude oil prices have surged by more than 30% cumulatively. The U.S. national average retail gasoline price surpassed $4 per gallon for the first time in over three years, with March's monthly increase hitting the highest level since records began in 1967, making it the primary catalyst for inflation. The impact of rising diesel prices is even more profound; as a core fuel for industry and transportation, its rising costs are rippling through supply chains into the broader economy.

While March core CPI—which excludes food and energy—rose just 0.2% month-on-month, coming in below market expectations and providing temporary relief, economists widely warn that this is merely the first wave of the energy shock. More severe secondary transmission effects are currently building.

A number of companies have already issued price hike warnings. Airlines including Delta Air Lines are raising fares due to higher jet fuel costs; the U.S. Postal Service announced it will increase mailing rates; and rising fertilizer prices have begun to hit agricultural producers, likely driving up food prices in the coming months. Higher costs for industrial raw materials like plastics are also expected to impact the price of various consumer goods.

Rate cut expectations cool

The sharp rise in inflation data has further constrained the Federal Reserve's policy space. The minutes of the March monetary policy meeting show that an increasing number of policymakers are leaning toward maintaining high interest rates or even raising them, rather than the rate cuts previously expected by the market.

Although some officials remain concerned that geopolitical conflicts could weigh on the labor market, the rise in inflation risks has clearly become a more pressing consideration.

Gregory Daco, Chief Economist at EY Parthenon, previously stated that looking ahead to the fourth quarter of 2026, the possibility of the Federal Reserve easing monetary policy remains, but that would be a result of economic deterioration rather than a choice for policy normalization. The more realistic risk at present is that the Fed's next policy move could be a rate hike rather than a cut.

However, market expectations for rate cuts within the year have not entirely dissipated. Some economists believe that if the labor market experiences substantial deterioration in the future, the Federal Reserve still has the possibility of adjusting its policy path.