Fed’s key inflation gauge hits 3.5% as Iran war pushes up gas prices

(CNN) — Fast-rising gas prices lifted the Federal Reserve’s preferred inflation gauge to 3.5% in March, its highest rate in almost three years, new data showed Thursday.

The Personal Consumption Expenditures price index rose 0.7% from February, a faster-than-expected acceleration from the previous monthly pace of 0.4%, the Commerce Department reported Thursday. The annual rate of inflation, which jumped from 2.8% in February, is now running at its fastest pace since May 2023.

Economists were expecting the price index to rise 0.6% from the month before and 3.6% on an annual basis, according to FactSet.

The PCE Price Index is the inflation gauge the Federal Reserve uses for its 2% target rate.

The US-Israeli war against Iran, which is now entering its ninth week, has sent shockwaves through the global economy. Shipping traffic in the Persian Gulf and the Strait of Hormuz has slowed to a trickle, choking off a vital waterway for the trade of oil, natural gas, fertilizer and other critical materials.

The sharp hike in energy prices, an aftershock of the Middle East conflict’s squeeze on the oil trade, was largely responsible for the sudden jump in inflation.

When excluding food and energy costs, prices rose 0.3% from the month before (a slight downshift from the 0.4% monthly gain notched in February) and increased 3.2% on an annual basis. That’s in line with what economists were expecting; however, the annual rate did move up from 3%.

In addition to the PCE price index, which the Federal Reserve uses for its 2% inflation target, Thursday’s Commerce Department report also provided a look at how households’ spending, income and savings were holding up.

Consumer spending jumped 0.9% from February, but when taking inflation into account, it rose just 0.2%.

The dollars consumers put in their gas tanks and toward other energy goods accounted for 42% of the month’s spending change, Commerce Department data shows.

Households’ personal and disposable (after-tax) income both rose at 0.6% paces in March; however, when accounting for inflation, disposable income dropped by 0.1%, the second consecutive monthly decline.

The personal saving rate fell for the second month in a row as well, dropping to 3.6% from 3.9% and landing at the lowest rate in four years.

Americans have had to adjust to sharply rising gas prices; however, the energy shock hit at a time when many consumers’ coffers were buffered a bit by larger tax refunds. Additionally, wage gains, although slowing, continue to outpace inflation, and some Americans are seeing wealth boosts from rising stock and home values.

The economy has remained “quite resilient,” despite inflation “misbehaving,” Fed Chair Jerome Powell said Wednesday as the US central bank opted to leave interest rates unchanged.

Separate data released Thursday added some support to that resiliency diagnosis: The economy grew at a 2% annualized rate during the first quarter; the estimated 189,000 jobless claims filed last week mark a nearly 60-year low; and workers’ wages and benefits rose at a stronger-than-expected rate of 3.4% during the first quarter.

The US economy does appear to still have “some gas in the tank,” but how much longer households can sustain high oil prices and potential accelerations in inflation remains a key question, noted Scott Anderson, chief US economist at BMO Capital Markets.

“If inflation pressures continue to build in the months ahead, it will be more and more difficult for consumers to keep up,” Anderson wrote in a note to investors on Thursday. “The rapid drop in the personal saving rate since the beginning of the year is a cautionary flag as we move into the second quarter.”

This story is developing and will be updated.

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