Inflation Climbs to 3.3% on Surging Oil Prices Fueled by Iran War

Inflation surged in March, propelled by drastically higher energy prices resulting from the U.S.-Iran conflict that throttled a critical crude oil transit point.

Overall prices increased by 3.3% in the 12 months through March, in line with economist expectations, up from 2.4% in February, according to the U.S. Labor Department's Consumer Price Index (CPI) data released Friday. This marks the largest annual increase in nearly two years.  

Core inflation, which strips out volatile food and energy prices, increased to 2.6%, up from 2.5% in February, also meeting forecasts and signalling underlying price pressures.

On a monthly basis, headline inflation measuring overall price changes jumped 0.9%, while core inflation rose 0.2% from the month before.

The energy index increased 10.9% in March from a month earlier, accounting for nearly three-quarters of the total monthly cost increases across all items.

Gasoline of all types saw a 21.2% surge, the largest increase since the series began in 1967, while fuel oil jumped a staggering 30.7%.

On Friday, a gallon of regular gasoline cost on averaging $4.15, up from $3.54 last month, according to AAA. 

Realtor.com® senior economist Jake Krimmel says the March readout marks a significant acceleration in inflation, dealing a major blow to consumers' pocketbooks.

"Even if higher gas prices are temporary enough for central bankers to look through, consumers have no such luxury," says Krimmel. "The more prices rise, especially on highly visible purchases like gasoline, the more households tighten their belts; and that has real consequences for spending, confidence, and big decisions like buying a home."

What this means for housing

For the Federal Reserve, the inflation-boosting oil shock triggered by war complicates matters as the central bank's policymakers prepare for their next Federal Open Market Committee Meeting (FOMC) on April 28.

Federal Reserve Bank of Cleveland Beth Hammack said in an interview with the Associated Press earlier this week that she can foresee a scenario in which interest rates might need to be raised if inflation stays persistently above the Fed's 2% target. 

Financial markets now put the probability of the Fed holding interest rates at their present range of 3.5% to 3.75% at 98.5%, according to CME FedWatch.

As the housing market enters the typically busy spring selling season, it finds itself weighed down by wavering consumer confidence and purchasing power. 

The good news is that mortgage rates ticked down this week to 6.37%, snapping a five-week streak of increases. This was largely in response to the recently announced Iran ceasefire deal bringing down Treasury yields, in what Krimmel is calling "yet another reminder that resolving geopolitical uncertainty is one of the most direct paths to lower borrowing costs."

The Realtor.com Market Clock shows the U.S. is entering the spring season with the most fragmented housing market in eight years, so although the big-picture backdrop of higher inflation and uncertainty is shared across metros, conditions on the ground vary widely. 

"Forecasting the spring remains difficult, but resolving geopolitical uncertainty will go a long way toward stemming inflation, restoring confidence, and ensuring smoother sailing for the housing market," notes the economist.