“For consumers, this is very real,” said Mike Reid, the head of U.S. economics at RBC. While the inflation surge was largely due to energy prices, which can be volatile, the outlook now depends on how long the “conflict in the Middle East lasts, and what is the risk that higher energy prices start to spill over into the broader economy,” he added.
High inflation plagued former President Joe Biden’s presidency, and Trump was elected to a second term on the promise of containing price growth and unleashing an economic “golden age” that would benefit working Americans. The president had repeatedly cited the reduction in gas and energy prices throughout a recent push to highlight his administration’s affordability agenda, a message that has been undermined now that gasoline is running north of $4 per gallon.
Democrats have seized on the war’s effect on prices. Democratic National Committee Chair Ken Martin said Trump’s “unhinged” trade policies and “unpopular war with Iran” have given Americans “nothing except even higher prices.” Sen. Elizabeth Warren (D-Mass.) said that “every family struggling to fill their gas tank or buy groceries knows exactly who is responsible.”
White House officials say the war-related price hikes and market disruptions will be temporary. But the longer the Strait of Hormuz remains closed to most tanker traffic, the greater the likelihood that the economic pain will worsen. Despite a two-week ceasefire announced earlier this week, Trump on Thursday said Iran is doing a “very poor job” of allowing oil through the strait.
“President Trump has always been clear about short-term disruptions as a result of Operation Epic Fury, disruptions that the Administration has been diligently working to mitigate,” White House spokesperson Kush Desai posted on X shortly after the CPI release. “Although gas and energy prices are seeing volatility, prices of eggs, beef, prescription drugs, dairy, and other household essentials are falling or remain stable thanks to President Trump’s policies.”
The so-called core measure inflation — which strips out volatile food and energy costs — climbed at an annual rate of 2.6 percent last month, below the expectations of most economists but above the 2.5 percent increase notched in February. That’s a sign that Iran-related price increases have been largely contained to the energy sector, and it’s good news for Federal Reserve policymakers, who had signaled that rate increases may be necessary later this year.
“This is a very big jump to headline inflation, which will impact real incomes immediately. But from a policy point of view — and maybe a market point of view — there will be some relief that the core [seems] to be contained so far,” said Michael Metcalfe, the head of macro strategy at State Street Markets. “This doesn’t look like 2022.”
Even so, within the Fed’s preferred inflation gauge — the Commerce Department’s personal consumption expenditures index — core sectors have been running warmer than most central bank policymakers would like. That index rose at an annual rate of 3 percent in February, according to a release published Thursday, and that may give the Fed less room for error if the oil shock spreads beyond energy.
“They have to actually be meaningfully worried,” said Joe Tracy, a former top adviser to leaders at the New York and Dallas Federal Reserve Banks and a nonresident senior fellow at the American Enterprise Institute. “As these shocks start to work through, and we see inflation meaningfully higher, inflation expectations could become unanchored.”