Middle East Conflict Sparks U.S. Inflation Surge: March CPI Hits Two-Year High as Fed Rate Cut Hopes Dim

On April 10, 2026, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index surged 0.9 percent in March, the largest monthly increase since 2022, driven by soaring gasoline prices resulting from the war in the Middle East. The year-over-year CPI inflation rate climbed to 3.3 percent, the highest since May 2024. Unadjusted energy inflation jumped 10.9 percent month-over-month, the steepest rise since 2005, with gasoline prices posting their largest recorded increase since 1967 and accounting for nearly three-quarters of the overall CPI gain.

According to AAA, the national average gasoline price reached $4.14 per gallon on April 7, the highest level since August 2022, up from under $3 per gallon before the U.S.-Israeli strikes on Iran. Core CPI, which excludes food and energy, rose 2.6 percent year-over-year, below expectations, suggesting the energy shock has yet to spread broadly into services and goods. However, economists warn that a “second wave” of pass-through effects—including higher airfares from elevated jet fuel costs and increased freight expenses from pricier diesel—will likely materialize in the coming months.

Meanwhile, March nonfarm payrolls increased by 178,000, far exceeding the 60,000 forecast, and the unemployment rate edged down to 4.3 percent, further reducing pressure on the Federal Reserve to ease policy. San Francisco Fed President Mary Daly noted that the oil price shock has extended the timeline for inflation to return to the Fed‘s 2 percent target and that the central bank is likely to enter a “wait-and-see” period. Futures markets now price in virtually no chance of a rate cut in 2026. The IMF, in its April 2 Article IV report, projected U.S. GDP growth of 2.4 percent in 2026 and anticipated core PCE inflation returning to 2 percent by early 2027, though it cautioned that energy price uncertainty poses persistent upside risks.