The March CPI report marked a meaningful reacceleration in headline inflation, on both a monthly and annual basis, driven largely by the surge in energy prices tied to the conflict in the Middle East. Headline inflation increased 0.9% month over month, lifting the annual rate to 3.3%, its highest level in nearly two years. By contrast, core inflation, which excludes food and energy, remained somewhat contained at 2.6%, suggesting that despite the energy shock, underlying price pressures remain sticky but stable. Underneath the surface, goods inflation, particularly in tariff-sensitive categories, showed signs of easing, offering an offset to energy-driven inflation.

Overall, the inflation report came in broadly as expected, and the limited movement in core inflation suggests that energy price pressures are having a limited second-round impact on core inflation. However, given the historical lag between headline and core inflation, policymakers will likely remain vigilant in monitoring the size and scope of energy-driven pass-through.

• Headline inflation rose 0.9% from the prior month, as expected, pushing the annual rate to 3.3%, the highest reading in almost two years. Core inflation, which excludes food and energy, rose 0.2%, a touch below expectations, lifting the annual rate to 2.6% (from 2.5% last month). While the sharp acceleration in energy prices due to the Middle East conflict is notable, the limited move in core inflation offers some reassurance that underlying price pressures remain contained. However, energy prices typically take time to feed through to core inflation via second‑round effects. As such, monitoring broader signs of pass-through ahead is warranted.
• Energy accounted for the bulk of the monthly headline CPI increase. Energy prices surged 10.9% over the month, the largest monthly increase since 2005, driven primarily by the sharp rise in fuel, and marked a clear reversal from the prior disinflationary impulse that energy had provided over the past two years. Meanwhile, food prices slowed and posted the lowest growth rate in over a year, with five of the six major grocery food indices declining. The softness likely reflects some tariff relief following the Supreme Court’s February ruling against the Trump administration’s implementation of tariffs and the shift to a universal 10% rate, which is lower than the prior effective rate for several trading partners.
• Goods inflation remained fairly benign, edging slightly higher last month. Tariff-sensitive items were mixed: apparel prices rose the most among major goods categories, though offset by declines in household furnishings and medical care commodities. Nevertheless, the tariff situation remains fluid, as the administration rolled out new tariffs on pharmaceuticals earlier this week while adjusting rates on steel and aluminum. Although there’s lingering uncertainty around tariffs, pass-through effects are still expected to broadly diminish over the course of the year. 
• Core inflation continued to be driven primarily by services prices. Shelter costs rose 0.3%, broadly in line with recent months, and remain the largest contributor to core inflation. Encouragingly, owner’s equivalent rent, a major component of shelter, continues to follow its three-year deceleration trend. Outside of shelter, price increases across categories such as education, airline fares and transportation, and select public services (water, sewer, and trash collection) were offset by declines in health insurance, recreation services, and personal care. That said, energy cost pass-through should be monitored closely for broader knock-on effects. .
• The Fed’s preferred supercore inflation measure increased by 0.2% in March, pushing the annual rate up to 3.1% from last month’s 2.7% reading. The data suggest that wage‑driven services inflation remains sticky, though with labor demand gradually softening, upside risk to supercore inflation seems limited for now.

Today’s CPI report confirmed inflationary spillover from the Middle East conflict, driven by the sharp surge in energy prices since airstrikes against Iran began in late February. Despite the energy shock, underlying price pressures remain stable, albeit sticky, with core inflation still above the Fed’s target. 

While diplomatic talks between the U.S. and Iran, and separately between Israel and Lebanon, are planned, the fluid situation and extent of infrastructure damage make a rapid return to pre-conflict energy prices unlikely. Attention ahead will likely center on how long energy prices remain elevated and whether second-round inflationary effects begin to seep into broader inflation measures, a dynamic that would have larger implications for the Fed. 

Taken together, the CPI report underscores how quickly geopolitics can reintroduce inflation risk just as disinflation appeared to be back on track. While the Fed may initially look through the energy shock, any signs of de‑anchored inflation expectations would leave policymakers with little room to ease. As a result, the bar for rate cuts has risen: our base case now calls for just one 25bp cut later this year, with further easing deferred to 2027. Ultimately, the duration of elevated energy prices, and whether they bleed into core inflation, will determine whether that already cautious path becomes even more restrictive.