US inflation hits 3.3% as energy prices surge, but core inflation stays subdued

Consumer prices in the United States accelerated sharply in March as rising energy costs linked to the Iran conflict pushed inflation further away from the Federal Reserve’s target, even as underlying price pressures remained relatively contained.

Data released by the Bureau of Labor Statistics showed the consumer price index rose 0.9% on a seasonally adjusted basis during the month, taking the annual inflation rate to 3.3%.

The increase was largely driven by a 10.9% surge in energy prices, reflecting the impact of geopolitical tensions on fuel markets.

The annual rate marked the highest level since April 2024 and a notable jump from February’s 2.4%, underscoring how quickly external shocks can influence headline inflation.

Gasoline prices alone climbed 21.2% in March, accounting for nearly three-quarters of the overall increase in consumer prices, according to the report.

Core inflation remains contained

Despite the sharp rise in headline inflation, underlying price pressures showed signs of stability.

Core inflation, which excludes volatile food and energy components, rose just 0.2% for the month and 2.6% compared with a year earlier—both slightly below market expectations.

Several categories even registered outright declines, including medical care, personal care, and used cars and trucks, suggesting that broader inflationary pressures remain uneven.

Services inflation, a key metric closely watched by policymakers, also remained moderate.

Services excluding energy rose 0.2% on the month and 3% annually.

Shelter costs increased 0.3% monthly and 3% year-on-year, marking one of the lowest readings since 2021.

Food prices were unchanged during the month, with food-at-home costs declining 0.2%, while new vehicle prices edged up just 0.1%.

However, some categories reflected the combined effects of tariffs and geopolitical tensions, with airline fares rising 2.7% and apparel prices increasing 1%.

Fed likely to stay patient

The divergence between headline and core inflation is likely to shape the Federal Reserve’s policy response in the coming months.

While the surge in energy prices has complicated the inflation outlook, policymakers may choose to look past what appears to be a temporary shock.

Energy prices have already begun to moderate in April following a ceasefire between the US and Iran, easing concerns about sustained supply disruptions.

“We believe the Fed will look through the energy-driven noise so long as these factors hold,” said Alexandra Wilson-Elizondo of Goldman Sachs Asset Management.

She added that the central bank “has room to be patient” and that “today’s number buys the Fed time, but the real test lies ahead.”

Markets appear to be aligned with that view.

Traders have largely priced out the possibility of interest rate cuts through the remainder of 2026, although Fed officials have signalled openness to easing if economic conditions deteriorate.

Bret Kenwell, US investment analyst at eToro, said the latest data reinforces a cautious stance.

“When paired with Thursday's PCE data, the message is clear: inflation remains sticky,” he said, adding that this assumes the recent energy surge proves temporary rather than structural.

“It should keep policymakers on pause, unless we see a more notable deterioration in the labor market or the broader economy,” he added.

Markets show muted reaction

Financial markets showed limited immediate reaction to the inflation data.

Stock indices edged slightly higher, while Treasury yields were mixed, indicating that investors had largely anticipated the rise in headline inflation.

For now, the trajectory of energy prices and geopolitical developments will remain key variables.

If the recent easing in oil markets persists, it could help stabilise inflation in the coming months.

However, the persistence of core inflation above target levels suggests that the Federal Reserve’s path toward rate cuts remains uncertain, with policymakers likely to prioritise stability over swift action.