Inflation hits the gas pedal

Just when you hoped inflation finally got the hint the party was over, it climbed back in through the bathroom window and is now setting up a tent in your living room.

It’s only spring and still chilly, but in the March consumer price index, inflation came in red hot.

• Headline inflation rose 3.3% year over year, up from 2.4% last month—the biggest monthly jump since June 2022.
• The culprit was surging energy prices triggered by the Iran war. Gas prices jumped 21%—the biggest monthly gain in 59 years.
• Thankfully core CPI (which strips out food and energy) rose just 0.2% for the second straight month, suggesting underlying inflation hasn’t meaningfully accelerated.

That’s not all: Yesterday, the personal consumption index for February (the Fed’s preferred inflation gauge) showed that inflation was still sticky, but not skyrocketing, before the recent energy shock: Both headline and core prices rose 0.4% on a monthly basis, roughly in line with expectations.

The Fed’s pickle

While inflation is picking back up, shoppers are down bad. Consumer sentiment plunged to a record low this month, according to a University of Michigan survey. It’s understandable why: The energy shock from the Iran war is just starting to make its way through the economy, and is expected to spike the costs of everything from airline tickets to groceries.

The Federal Reserve’s job has never been a simple one, but the economic whiplash of the past few months is making this economic policy decision a game of 4D chess. If the Fed cuts rates, it could re-stoke inflation.But if the central bank decides to hike rates—a move members started to soft launch last month—it would be a blow to the already sluggish economy.

The silver lining: While none of this news sounds particularly optimistic, according to the pros, if the Iran war does in fact wind down, higher levels of inflation shouldn’t last for long.

“Energy is back in the driver’s seat for inflation, but the broader path remains one of gradual stabilization, suggesting the Fed can remain patient,” Chief Investment and Portfolio Strategist at BlackRock Gargi Chaudhuri explained in a note. “Markets will look through the energy-driven headline strength and focus on the softer core trend.”

That underlying optimism is why traders actually upped their bets that there will be a rate cut—not because inflation is cooling today, but because falling oil prices could quickly reverse the recent spike.

Then again, the April 7 ceasefire is by no means a done deal. TLDR: The more info we get, the less anyone knows what will happen next.—LB