With Middle East hostilities and Iran's blockade of the Strait of Hormuz triggering a surge in energy prices, the U.S. Consumer Price Index (CPI) has undoubtedly surpassed nonfarm payrolls as the most closely watched U.S. economic indicator at this stage. At 20:30 Beijing time tonight, the U.S. Department of Labor will release the highly anticipated March CPI report, which will be the first inflation report to reflect the "war premium" stemming from the Middle East conflict. Industry insiders widely anticipate that, due to the war involving the U.S., Israel, and Iran pushing up oil prices, coupled with persistent tariff pass-through effects, the U.S. March CPI likely recorded its largest monthly increase in nearly four years, further dampening hopes for interest rate cuts this year.
Over the past month, the conflict has driven U.S. gasoline prices above $4 per gallon, making it almost certain that the trend of moderating oil price growth reflected in U.S. inflation indicators at the start of the year will be reversed. Of course, energy prices are not the only concern for market observers: approximately one-third of global seaborne fertilizer shipments pass through the Strait of Hormuz, which could ultimately exacerbate already elevated food prices. Consequently, many industry participants are focusing their attention tonight on the performance of the headline CPI figure, particularly the monthly reading.
According to a media survey of economists, the U.S. CPI report due Friday is expected to show a 0.9% month-on-month increase in March. This projected 0.9% monthly rise is itself a striking figure. Notably, since 1981, the U.S. monthly CPI has increased by 0.9% or more only 16 times. This would also be the largest monthly increase since June 2022—a period when U.S. CPI year-on-year growth exceeded 9%. On an annual basis, economists forecast that this monthly surge will push the March CPI up 3.3% year-on-year, which would be the highest level since April 2024. In February, U.S. CPI rose 2.4% year-on-year—indicating a gap of nearly one percentage point between the previous reading and current market expectations.
The chart below shows specific forecasts from Wall Street investment banks for the March CPI monthly reading. Predictions are generally clustered above 0.8%, with some institutions forecasting the increase could "exceed 1%." The subsequent chart displays the distribution of forecasts for the March CPI year-on-year increase, also broken down by major banks. Based on these projections, a year-on-year CPI reading "above 3%" appears almost certain.
Jim Reid, Head of Global Fundamental Credit Strategy at Deutsche Bank, wrote in a commentary, "The impact of the energy price shock will be fully evident in the March CPI report." Brian Bethune, Economics Professor at Boston College, also expects that "tonight's headline CPI number will be quite ugly, and a second wave of impact may be imminent, with fuel surcharges beginning to appear and pass through to other goods, particularly impacting food prices."
However, as this is only the first inflation report reflecting the impact of the Middle East conflict, the core CPI—which excludes food and energy prices—might still show relatively moderate fluctuations in March. The media survey indicates economists expect U.S. core inflation to rise 0.3% month-on-month and 2.7% year-on-year in March, compared to previous readings of 0.2% and 2.5%, respectively.
Stephen Juneau, U.S. Economist at Bank of America, stated in a report this week, "While it might be difficult to see the impact of the Iran conflict on core inflation just yet, we will be watching airfares and logistics services closely for any early signs that rising oil prices are permeating a broader basket of goods." Furthermore, tariff impacts are expected to continue exerting upward pressure on prices. Goldman Sachs economists Jessica Rindels and Ronnie Walker noted in a report this week that they expect tariffs "to continue to modestly boost monthly inflation in the coming months," affecting categories including recreation, household furnishings, and others.
Regarding the performance of the March CPI, Goldman Sachs forecasts headline CPI will rise 3.28% year-on-year and 0.87% month-on-month—both aligning with the current market consensus. The bank attributes the headline CPI increase primarily to rising food prices (+0.3% monthly) and a significant jump in energy prices (+9.4%), the latter itself reflecting higher oil and retail gasoline prices since the outbreak of the Iran conflict.
A detailed look at Goldman's forecast report highlights four key inflation components they expect to see trends for in this week's report: 1. **Autos:** Auto inflation is expected to be mixed, reflecting a 1% increase in used car prices based on auction price signals; flat new vehicle prices, reflecting largely unchanged sales incentives; and a 0.1% rise in motor vehicle insurance, reflecting premium increases indicated by their proprietary dataset. 2. **Housing:** Primary rent categories are forecast to rise a modest 0.20% monthly, reflecting a continued slowdown in the underlying trend. Owners' Equivalent Rent (OER) is predicted to accelerate to 0.30%, reflecting upward pressure from a rebound after an unusually weak September reading, which itself was due to a larger decline in the New England OER index. 3. **Travel Services:** Travel services inflation is expected to be strong, partly reflecting pass-through from oil price increases since the conflict began. Airfare is forecast to rise 4% monthly, reflecting significant increases in jet fuel prices, while hotel prices are expected to increase 0.5%, based on signals from alternative price data. 4. **Tariffs:** Tariffs are expected to exert upward pressure on categories with high exposure, adding +0.03 percentage points to core monthly inflation. Tariffs are seen potentially driving price increases in recreation (+0.2%), education (+0.2%), household furnishings (+0.3%), communication (+0.1%), and personal care (+0.3%).
Notably, Goldman Sachs suggests that after the March CPI surpasses 3% year-on-year, energy prices could see another significant rise in April, potentially pushing the April headline CPI year-on-year increase to around 4%. The last time U.S. inflation exhibited such a rapid upward trajectory, breaching consecutive whole-number thresholds, was back in 2022. At that time, post-pandemic supply chain crises combined with energy price spikes from the Russia-Ukraine conflict pushed U.S. CPI above 9% year-on-year in June 2022.
The Fed's March meeting minutes released earlier this week indicated that a "vast majority" of officials believe the process of inflation returning to target may be slower than expected, driven by three intertwined concerns: the impact of tariffs on goods prices may take longer to fade; oil prices are permeating core inflation measures; and years of above-target inflation may make consumers and businesses more accepting of further price increases. Currently, the energy price shock from the U.S.-Iran conflict is undoubtedly making the Federal Reserve increasingly cautious.
Recent comments from Fed officials generally lean towards holding rates steady while assessing the energy shock's impact, awaiting clearer directional progress on inflation. Policymakers have stated that rate cuts would require weakness in the labor market, and while rate hikes are not the baseline scenario, they cannot be ruled out if inflation surges. Middle East geopolitical events could boost inflation via energy and supply chains while hurting growth, so a transient shock might be overlooked, but any prolonged disruption could delay the timing of rate cuts.
In fact, beyond the March CPI report, the performance of U.S. prices in the coming months is even more concerning. Some economists expect the Middle East conflict to elevate core prices through expensive jet fuel (which would raise airfares) and diesel (increasing costs for road-transported goods). Prices for commodities like fertilizer and plastics are also anticipated to rise. "The price increases we're seeing are already in the pipeline, and we will continue to see inflation rise," said Dan North, Senior Economist at Allianz Trade Americas, noting that the duration of the geopolitical conflict will determine how long the inflationary impact lasts.
Rising inflation has led some economists to believe the Fed will not cut rates this year, a view reinforced after the release of the March FOMC meeting minutes. Gregory Daco, Chief Economist at EY Parthenon, stated, "When we look ahead, say to Q4 2026 and year-end, there might be factors prompting Fed easing, but that would be for the wrong reasons (like a recession). And we now have to contend with the very real possibility that the Fed's next move could be a rate hike."
Prominent journalist Nick Timiraos also pointed out recently that the Fed's current cautious stance echoes a framework proposed over two decades ago by then-Chairman Ben Bernanke. Bernanke argued that a central bank's response to an oil price shock should depend on the level of inflation when the shock occurs. When inflation is already low and inflation expectations are well-anchored, policymakers can "look through" or ignore the inflationary impact of rising energy prices. But when inflation is already above target, the risk that a supply shock could further destabilize inflation expectations would necessitate a tighter policy response—a scenario some officials believe more closely resembles the Fed's current situation.
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