Energy prices drive up inflation to 0.9% in March

• Key insight: Inflation accelerated in March, driven primarily by a surge in energy prices since the onset of the U.S. war in Iran.
• Supporting data: The Consumer Price Index, a monthly indicator of consumer inflation, rose 0.9% in March and 3.3% year-on-year. Gasoline prices were up 21.2% in March, accounting for three-quarters of the overall rise in inflation.
• Forward look: The Federal Reserve’s interest rate-setting body has said it is and will remain cautious about future rate cuts, with several officials saying they view the oil shock as temporary but wary of its potential to drive consumer inflation expectations.

The Bureau of Labor Statistics reports that the prices consumers pay spiked in March, with the Consumer Price Index rising 0.9% over the month and 3.3% from a year ago, driven almost entirely by an increase in energy prices. 
In March, gasoline prices surged 21.2%, pushing the overall energy index up 10.9%, the largest monthly increase in the index since September 2005. Gasoline prices accounted for nearly three-quarters of the overall increase, the BLS said.

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Fuel oil rose 30.7%, the largest monthly increase in the index since February 2000. Electricity prices increased 0.8% and natural gas fell 0.9%. 

Food prices were flat in March after rising 0.4% in February, with food at home and food at restaurants going in opposite directions; grocery prices fell 0.2%, while dining out edged up 0.2%. Within groceries, prices for meat, poultry, fish, and eggs fell 0.6%, with eggs specifically falling 3.4% over the month. Fruits and vegetables, however, rose 1.0%. 

On a yearly basis, food prices are up 2.7%, with grocery prices increasing 1.9% and food away from home climbing 3.8%. 

Core inflation, which excludes food and energy, continued to show moderation, rising 0.2% in March for the second straight month and 2.6% over the past year. Shelter costs rose 0.3% in March. 

In February, numbers showed inflation continuing to rise, but at a moderate pace. Monthly inflation rose 0.3% in February, and settled at 2.4% year-over-year. Shelter remained the primary driver, alongside persistent food and energy costs, while core inflation increased a modest 0.2%. 

After lowering interest rates in three consecutive meetings to close out 2025, the Federal Reserve’s Federal Open Market Committee voted to keep its federal funds rate target range steady at 3.5% to 3.75% since January. 

Federal Reserve Gov. Michael Barr in March signaled that a decline in goods and services inflation would be a clear indicator of when to consider to cut rates, “provided labor market conditions remain stable.”

While some members, like Governor Stephen Miran, have advocated for gradual interest rate cuts, he was the only dissenting voice to the FOMC’s decision to keep rates steady during the March meeting. 

“Traditionally, you would look through an oil price shock like this, which means that my policy outlook from before is unchanged, and my policy outlook from before would be gradual cuts of interest rates,” Miran said In an appearance on Bloomberg TV last month. “I had about six cuts for the year in December. I reduced that to four cuts for the year in response to the inflation data between the two projection periods.”

Fed Chair Jerome Powell has stated that rate cuts depend on continued progress in controlling inflation. Higher oil prices, partly due to the war in Iran, are a concern for inflation, though some officials view this as a temporary shock rather than an ongoing inflationary pressure. 

Speaking at an event at Harvard University in front of a live audience on March 30, Powell said the body is considering the impact on inflationary expectations of the war. 

“You have to carefully monitor inflation expectations, because a series of these supply shocks can lead the public, businesses and households to start expecting higher inflation over time,” Powell said.