US inflation hits 3-year high as Iran war drives gas prices

WASHINGTON — A key measure of U.S. inflation surged to its highest level in three years in March, as rising gasoline prices linked to the Iran war pushed the cost of living higher and complicated the outlook for interest rate cuts.

Energy shock drives inflation spike

The sharp increase was largely fueled by energy costs, with gasoline prices jumping nearly 21% in March alone.

The surge reflects ongoing disruptions tied to the Iran conflict, particularly the closure of the Strait of Hormuz, a critical global oil route.

As a result:

• Average U.S. gas prices reached about $4.30 per gallon
• Oil prices climbed above $100 per barrel
• Energy costs spread into broader consumer prices

Core inflation remains elevated

Excluding volatile food and energy categories, so-called core inflation rose 0.3% in March and 3.2% year over year.

Although slightly lower than headline inflation, the figure remains well above the Federal Reserve’s 2% target, signaling persistent price pressures across the economy.

Federal Reserve delays rate cuts

The inflation spike is likely to keep the Federal Reserve on hold for longer.

Fed Chair Jerome Powell indicated this week that policymakers are closely monitoring the impact of the Iran war before making any changes to interest rates.

The central bank has already paused after cutting rates three times last year, and elevated inflation reduces the likelihood of near-term easing.

Households feel the squeeze

While incomes rose 0.6% in March, the increase lagged behind inflation for the second consecutive month, eroding purchasing power.

Higher fuel costs are also reshaping consumer behavior, diverting spending away from other goods and services.

Economists warn this dynamic could slow economic growth in the months ahead, even as overall demand remains relatively strong.

Consumer spending shows resilience

Despite rising prices, consumer spending increased 0.9% in March.

Much of that gain reflects higher costs rather than stronger real demand, but it also suggests households are still willing to spend, supported in part by tax refunds and steady employment.

Economic outlook weakens

Analysts say the inflation surge represents a broader risk to the U.S. economy.

The energy shock caused by the Iran war is expected to:

• Weigh on growth forecasts
• Delay monetary policy easing
• Increase uncertainty for businesses and consumers

Some economists now expect growth to slow to around 1.7% in 2026, down from earlier projections.

Inflation in the U.S. is accelerating again, driven largely by rising energy prices tied to the Iran war, complicating the Federal Reserve’s path and putting renewed pressure on consumers.