Inflation Heats up again as Iran Conflict Pushes Prices Higher, Complicating Fed’s Next Move

The Hill, CNBC, AP, Market Watch contributed to this report.

Inflation picked up speed in March, and the driver wasn’t subtle. Rising energy costs tied to the war in Iran pushed prices higher across the board, keeping pressure on households and putting the Federal Reserve in a tougher spot.

Fresh data from the Commerce Department showed the personal consumption expenditures (PCE) price index – the Fed’s go-to inflation gauge – climbed 0.7% for the month. That’s a noticeable jump from February’s 0.4% increase. On an annual basis, inflation hit 3.5%, up from 2.8% the month before and the highest level in nearly three years.

Strip out food and energy, and the picture cools slightly but not by much. Core inflation rose 0.3% in March and is now running at 3.2% year over year – still well above the Fed’s 2% target.

Energy did most of the heavy lifting. Prices for energy goods and services surged more than 11%, fueled by a sharp spike in oil and gasoline as tensions in the Middle East escalated. Gas prices alone jumped roughly 21% in March, and they’ve stayed elevated, hovering above $4 a gallon nationally.

That surge is starting to bite.

Consumers spent more in March – up 0.9% – but much of that increase reflects higher prices rather than stronger demand. Adjusted for inflation, spending growth looks far more modest, and goods purchases actually slipped slightly. Income rose 0.6%, but for the second straight month, it didn’t keep pace with inflation.

Economists are increasingly describing a split economy. On one side, investment tied to artificial intelligence and corporate growth remains strong. On the other, everyday consumers are feeling squeezed by higher fuel costs and persistent inflation.

The broader economy isn’t collapsing, but it’s not exactly firing on all cylinders either. Gross domestic product grew at a 2% annualized pace in the first quarter – an improvement from late 2025, but still shy of expectations. Meanwhile, the labor market remains unusually tight, with jobless claims dropping to 189,000, the lowest level since 1969.

For the Fed, none of this makes life easier.

Policymakers already chose to hold interest rates steady this week, and the latest inflation data gives them little reason to rush into cuts. Internal divisions are becoming more visible too, with multiple officials signaling concern that inflation could stay elevated longer than hoped.

Fed Chair Jerome Powell acknowledged the strain higher gas prices are putting on consumers, and officials are watching closely to see how much those energy costs bleed into broader inflation in the months ahead.

For now, the message is clear: inflation isn’t backing down, and the path to lower interest rates just got a bit more complicated.