As the first key indication of whether the Iran war is feeding directly into inflation, economists predicted this week that the Consumer Price Index (CPI), to be released on Friday, would show that energy prices rose in March. Tomorrow’s CPI data will be crucial to see whether recent price hikes are temporary or the beginning of a stubborn inflationary cycle.
Here are five things to watch for in the report.
Energy prices will spike again.
The main driver of the March CPI report will be energy costs, specifically gasoline prices. Gasoline prices were up 20% in March – a stark increase over February, when gasoline prices were down about 1% from January. The overall CPI could potentially rise one full percentage point from February.
The Fed will not change its target.
The Federal Reserve is not going to change its target of 2% inflation. Economists say the Fed should be more realistic and change its target to slightly higher than 2%, which they say is not going to happen for the foreseeable future. Economists also predict that Americans are definitely not going to see inflation as low as 2% this year – not until late 2027.
If the rate of inflation continues to rise because of the war, the Fed may raise interest rates to counter the rising prices by lowering demand. For the Fed, the combination of tariffs passed on to consumers and rising energy costs will be hard to ignore, causing a further delay in rate cuts.
Higher gas prices make goods and services expensive.
While crude oil prices have recently retreated to $95 a barrel, from $120, there remains a high risk that persistent fuel surcharges across the food supply chain could turn a temporary price shock into a long-term inflationary burden. The speed of global economic recovery depends on the resolution of the Iran conflict, though the timeline for a full settlement remains highly uncertain.
Airfares should be a key source of upward pressure on core CPI. Economists forecast that the report will show airfares rose 7% from February, increasing the likelihood that airlines will pass on higher jet fuel costs to consumers.
Immigration policy affects the medical sector.
The cost of medical care services has been starting to go up pretty sharply in the second Trump administration. The industry is experiencing a labor shortage because many immigrant workers in the field have been deported or chosen to leave the country. For example, nursing homes and elder care facilities, where workers are predominantly immigrants, need to pay higher wages to those who remain, and they are passing the costs on to consumers.
Personal spending doesn’t indicate the spike, yet.
The March Personal Consumption Expenditures (PCE) report, released a day ahead of the CPI, did not yet show the inflationary spike from higher energy prices. But it did reflect the passthrough of tariffs. The three-month trend in both prices excluding volatile food and energy and the overall inflation rate points to inflation running closer to 4%, even before higher energy prices add further pressure.
