Fasten your seatbelt! Iran conflict ignites oil prices, US CPI may see largest month-on-month increase in four years tonight.

The U.S. Consumer Price Index (CPI) report for March is about to be released, and the market broadly expects this will be the largest single-month inflation increase in nearly four years. The energy price shock triggered by the Iran war is the main driver, while the secondary transmission effects have not yet fully emerged, which will further narrow the Fed’s space for rate cuts this year.

According to media surveys of economists, March CPI is expected to rise by 0.9% month-on-month, with the annual increase expected to surge from 2.4% in February to 3.3%, marking the largest year-on-year increase since May 2024. If the 0.9% monthly rise materializes, it will be the largest single-month increase since June 2022 during the Russia-Ukraine conflict. Some Wall Street institutions have more aggressive forecasts, with the median expectation for the annual increase as high as 3.4%. The Cleveland Fed’s real-time forecast points to an annual increase of about 3.25%. Due to the U.S.-Iran war, global crude oil prices have soared more than 30% cumulatively, and the national average retail gasoline price has surpassed $4 a gallon for the first time in over three years.

The timing of this data release is particularly sensitive. The minutes of the Fed’s March policy meeting released this week show that more and more officials believe rate hikes may be necessary; the federal funds rate currently remains in the 3.50% to 3.75% range. Several economists believe that if the high oil prices continue to feed into core inflation, the window for Fed rate cuts this year will shrink significantly, and the possibility of a rate hike cannot be ruled out.

It’s worth noting that the current CPI data does not fully reflect the total effects of the energy shock. Several economists warn that with jet fuel costs driving higher airfares, diesel price hikes pushing land transport costs up, and rising prices for commodities such as fertilizers and plastics, the second wave of energy shock transmission into core inflation will gradually unfold in the coming months.

Energy component may soar over 10%, driving overall CPI surge

The main driver behind March’s CPI spike is the energy shock caused by the Iran conflict. According to a JPMorgan research note released on the 9th, March energy prices are expected to rise about 11% month-on-month, the primary factor behind the sharp overall CPI jump. Goldman Sachs expects the energy component to rise 9.4% month-on-month, and food prices are also expected to increase by 0.3%.

Goldman forecasts overall CPI will rise 0.87% month-on-month, corresponding to a 3.28% year-on-year increase; JPMorgan expects a 0.96% month-on-month jump, with an annual increase of 3.4%. A Reuters survey shows a wide distribution among institutional estimates, ranging from 0.4% to 1.7%, reflecting considerable market disagreement on the oil price shock’s magnitude.

"The headline CPI figures will be quite ugly," said Boston College economics professor Brian Bethune:

"There’s another wave of shock brewing—fuel surcharges will start to appear and transmit to other commodities, food being the first affected."

Although Trump announced this Tuesday a two-week ceasefire agreement with Iran, conditional on Tehran reopening the Strait of Hormuz, the agreement is generally seen as fragile. Dan North, Chief Economist for Allianz Trade Americas, said, "Even if oil prices have eased recently, the price jump effect is already in the pipeline, and upward inflation momentum will persist." He added that the duration of the conflict will be a key variable determining the length of inflation impact.

Core inflation remains moderate, but secondary transmission pressures can’t be ignored

Compared with the sharp jump in headline CPI, core CPI, excluding food and energy, is expected to see a relatively moderate rise. According to media surveys, core CPI is expected to rise 0.3% month-on-month and climb mildly from 2.5% in February to 2.7% year-on-year. Goldman forecasts a 0.28% monthly increase and 2.69% annual increase; JPMorgan forecasts a core monthly rise of 0.26%, both slightly below market consensus.

Goldman’s report outlines four major trends in core inflation components: First is autos, with used car prices expected to rise about 1%, new car prices holding steady, and auto insurance up slightly by 0.1%; second is housing costs, with rent seen rising moderately by 0.2%, and Owners’ Equivalent Rent (OER) expected to rebound to 0.3% after technical adjustments from previous soft data; third is travel services, with airfares up 4% due to surging jet fuel costs and hotel prices up 0.5%; fourth is tariff effects, contributing about 0.03 points to core inflation, affecting categories such as entertainment, education, home furnishings, communications, and personal care.

Economists also warn that rising producer prices and factory input costs mean pipeline pressures may keep core inflation persistently firm. EY Parthenon Chief Economist Gregory Daco pointed out: "Looking ahead to year-end, there may be factors prompting the Fed to ease policy, but this would be for the wrong reasons. We must take seriously the real possibility that the Fed’s next move could be a hike."

Fed faces dilemma, rate-cut window continues to narrow

Inflation data will make the Fed’s policy situation even more tricky. The March meeting minutes released this week showed that more Fed officials have begun discussing the necessity of a rate hike, while the benchmark rate remains at 3.50%–3.75%.

Recent public statements from Fed officials overall lean toward keeping rates unchanged until inflation shows clearer signs of retreat, while assessing the sustained impact of the energy shock. Officials said that rate cuts require a clear weakening in the labor market, while hikes, although not the baseline scenario, cannot be ruled out if inflation rebounds sharply. Officials also stated that inflation expectations remain well anchored at present.

March jobs data show the labor market remains strong, but economists worry that if Middle East conflict drags on, high oil prices may gradually erode consumer purchasing power and then weigh on jobs. Some economists noted that consumers cutting spending amid high oil prices will also make it harder for businesses to fully pass on energy costs, leading to reverse demand suppression.

TIPS holdings expected to reach highest returns since Russia-Ukraine conflict

This CPI data will significantly impact the fixed income market. According to JPMorgan’s fixed income strategy report, if March CPI meets forecasts, the May return on 5-year TIPS and breakeven positions will soar to the highest level since the 2022 Russia-Ukraine conflict.

JPMorgan forecasts the unadjusted CPI-U index will rise to 330.613 in March, above Bloomberg consensus (330.535) and market pricing (330.380). The bank believes breakeven inflation valuation is relatively low, and current pricing for this year’s inflation is lower than its internal forecasts, so breakeven inflation rate has room for further widening. However, given the high uncertainty in geopolitics and market volatility being high, JPMorgan maintains a neutral stance on breakeven inflation rates before the data release.

The U.S. Treasury market has recently experienced dramatic fluctuations due to contradictory geopolitical signals, fully reflecting the market’s dilemma between high inflation and economic downside risks. Tonight’s CPI data will provide a key pricing basis for this ongoing struggle.

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