U.S. retail sales for March unexpectedly recorded their largest increase in a year, driven primarily by a sharp rise in gasoline station revenues amid elevated oil prices fueled by geopolitical tensions in the Middle East, along with stronger-than-expected consumer spending across multiple categories. The data underscores that despite surging fuel costs following conflict involving Iran, consumers have continued to maintain robust spending across a wide range of goods. Consumer spending, which accounts for nearly 70% of U.S. GDP, demonstrated notable resilience and ongoing momentum.
The latest figures also revealed that the retail sales "control group"—a subset of data that feeds directly into GDP calculations—rose more than anticipated on a monthly basis, marking the largest increase since August of last year. Consequently, following the release of this series of retail sales figures, interest rate futures traders have further scaled back expectations for the Federal Reserve to restart its rate-cutting cycle within the year. According to the CME FedWatch Tool, the majority of traders now bet that the Fed will maintain the current interest rate level through year-end—a shift from prior expectations of at least one rate cut before the data release.
The retail sales report released by the U.S. Commerce Department on Tuesday showed that overall retail sales rose 1.7% month-over-month in March—surpassing economists' upwardly revised consensus forecast of 1.5%. February's figure was also revised upward to a 0.7% increase. The March growth rate significantly outpaced both economist expectations and the prior month’s reading. The data is not adjusted for inflation.
A breakdown shows the March increase was largely propelled by a 15.5% surge in spending at gasoline stations, as conflict involving Iran pushed fuel prices to their highest level since 2022. Excluding gasoline stations, retail sales still grew 0.6% from the previous month.
Overall, geopolitical conflict in the Middle East—specifically involving Iran—drove fuel prices to multi-year highs, leading to a 15.5% monthly jump in gasoline station sales, which served as the primary driver of the overall retail sales expansion. The report indicates that although soaring gasoline prices were the main contributor to the stronger-than-expected retail sales figure, consumer spending remained firm across other categories last month. This strength may reflect larger-than-usual tax refunds flowing into American households in recent weeks.
Some senior economists have begun warning that this retail sales boost could prove temporary as the U.S. tax filing season winds down, fuel costs remain elevated, and hiring shows signs of moderation.
Nearly all of the 13 retail categories posted solid growth, including furniture, electronics, and general merchandise. Motor vehicle and parts dealer sales rose 0.5% from February. Sales at restaurants and bars—the only service category in the report—inched up 0.1% after multiple months of weakness.
In contrast to the strong retail sales report, recent high-frequency card spending data has been mixed. Analyses from PNC Financial Services Group Inc. and the Bank of America Institute indicated unexpected strength in discretionary categories such as travel services and consumer electronics. However, Visa’s Spending Momentum Index showed that when gasoline is excluded, spending in discretionary, non-discretionary, and dining categories all declined noticeably.
Notably, the retail sales report also showed that the closely watched "control group" sales—which exclude food services, auto dealers, building materials stores, and gasoline stations—unexpectedly increased 0.7% month-over-month, the largest gain since last August. The U.S. Bureau of Economic Analysis will release its initial estimate of first-quarter GDP on April 30.
Wall Street giant Citigroup viewed the March retail sales data, particularly the control group figures, as a key test for the "Fed rate cut expectation" narrative. Under Citi’s framework, if core consumer spending showed clear weakness after excluding noise from categories like gasoline stations, it would indicate that high oil prices were eroding demand, thereby reopening the door for rate cuts.
Citigroup suggested that if the Hormuz-related disruption proves temporary, elevated oil prices may not persist, and inflationary spillovers would lack long-term staying power. The bank also noted that the Fed’s reverse repo balance is nearing its floor, financial conditions are tightening marginally, mortgage rates are rising again, and the labor market is not strengthening significantly—all implying that monetary conditions are not loose enough to offset future growth slowdown risks.
However, the unexpectedly strong control group retail sales figure undermined Citi’s rate-cut logic—at least in the short term. U.S. retail sales rose 1.7% in March, with February’s gain revised up to 0.7%. More importantly, the control group retail sales—which feed directly into GDP calculations—also grew 0.7%, the largest increase since August. While nominal sales were lifted by oil prices—gas station sales jumped amid conflict-driven price increases—even excluding gasoline stations, retail sales still grew a solid 0.6%. This suggests that in March, U.S. consumers did not show signs of being "quickly crushed by high oil prices," as some had anticipated. Tax refund inflows and resilience in certain goods categories temporarily offset the energy shock.
In other words, the key data Citigroup used to validate its rate-cut framework did not deliver a sufficiently dovish signal.
Hopes for the Fed to restart rate cuts this year are fading. Recent inflation data showed the U.S. CPI rose 3.3% year-over-year in March, with core CPI up 2.6%. The monthly increase in headline CPI reached 0.9%. On the PPI front, final demand prices rose 0.5% month-over-month and 4.0% annually, with energy prices surging 8.5% from February. Combined with the stronger-than-expected retail sales data, these figures suggest the Fed is confronting a scenario reminiscent of stagflation—short-term growth resilience coupled with resurgent inflation.
In this environment, the Fed’s most natural response is not to cut rates quickly, but to wait for more evidence confirming whether the oil price shock will spread from energy to broader core prices and inflation expectations. This is a core part of Deutsche Bank’s rationale for expecting no Fed rate cuts throughout 2026. Goldman Sachs, Bank of America, and Barclays still project two rate cuts this year, but have pushed back the timing of the first cut to September.
Overall, Fed policymakers currently see neither steadily receding inflation nor rapidly deteriorating demand. The most natural policy response is continued patience rather than restarting a rate-cutting cycle. The combination of March retail sales, CPI, and PPI data largely signals to markets that a rate cut around June is increasingly unlikely. Whether cuts remain possible in September or beyond will depend on whether the oil-driven price trajectory dissipates and whether employment and core inflation show renewed signs of softening.
Latest pricing from the CME FedWatch Tool indicates market participants no longer expect any rate cuts this year. Before the latest escalation in Middle East geopolitical conflict, the market had priced in at least two Fed rate cuts in 2024.
What would be needed to revive the rate-cut outlook outlined by Citigroup and others is not just a single-month slowdown in nominal retail sales, but several months of clearly weakening control group retail sales, deteriorating labor market conditions, and no signs of oil-driven secondary inflation spreading uncontrollably to broader consumer endpoints. Until then, the Fed appears locked into a hawkish "higher for longer" observational mode.
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