US inflation hits 3.5%, highest in 2 years, dimming Fed rate-cut hopes

US consumers faced renewed inflationary pressure in March as rising oil prices linked to the Iran conflict pushed costs higher, complicating the policy path for the Federal Reserve.

Data released by the US Commerce Department on Thursday showed that the personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose sharply during the month.

The headline PCE index increased 0.7% in March, marking its biggest monthly gain since mid-2022.

On an annual basis, inflation accelerated to 3.5%, up from 2.8% in the previous month and the highest level since spring 2023.

Core inflation remains elevated

Core PCE, which strips out volatile food and energy prices, rose 0.3% for the month, taking the 12-month rate to 3.2%.

Both figures were in line with Dow Jones estimates, suggesting underlying inflation remains persistent.

The sharp rise in headline inflation was largely driven by higher gasoline and energy costs, reflecting a surge in crude oil prices as tensions between the US and Iran intensified.

The March data captures the first full month of the conflict, offering an early indication of how geopolitical risks are feeding into domestic price pressures.

Oil shock complicates Fed outlook

Federal Reserve Chair Jerome Powell had already flagged the risk of sustained inflation during the central bank’s April policy meeting, noting that elevated energy prices could continue to push up costs in the near term.

With oil prices rising again amid an ongoing stalemate between Washington and Tehran, economists warn that inflationary pressures could persist for longer than previously expected.

Higher inflation reduces the likelihood of near-term interest rate cuts, as policymakers remain focused on bringing price growth back toward the Fed’s 2% target.

The latest data suggests that goal is becoming more elusive, particularly if energy prices remain elevated.

Spending holds up but real gains muted

The report also highlighted resilience in consumer activity, even as higher prices eroded purchasing power.

Consumer spending rose 0.9% in March compared with February.

However, after adjusting for inflation, real spending increased by just 0.2%, indicating that much of the nominal growth was driven by rising prices rather than stronger demand.

Household spending continues to be a key pillar of the US economy, accounting for roughly two-thirds of overall activity.

US economy grows by 2%

Separate data showed that the US economy expanded at a 2% annualised pace in the first quarter, according to an initial estimate from the Bureau of Economic Analysis.

That marked an improvement from 0.5% growth in the previous quarter, although it came in slightly below expectations of 2.2%.

The expansion was supported by steady consumer demand and a sharp increase in business investment.

Spending on equipment rose 10.4%, the fastest pace in nearly three years, driven in part by investments in artificial intelligence technologies.

Consumer spending grew at a 1.6% annualised rate, reflecting continued demand for services despite the pressure of higher living costs.

The combination of firm economic growth and rising inflation presents a complex backdrop for policymakers, as the Federal Reserve balances the need to contain price pressures without derailing the broader recovery.