BREAKING: Oil Shock Spikes Inflation in March

No one who gassed up their car in the past six weeks could be surprised by this news. In fact, today’s report from the Bureau of Labor Statistics might offer a sigh of relief, because it could have been worse.

Today’s Consumer Price Index reading for March is worrisome enough, though. Inflation hit a three-year high, matching analysts’ expectations as gas prices drove everything upward. Prices rose by almost a full point in March alone, and April may not bring relief quickly:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent on a seasonally adjusted basis in March, after rising 0.3 percent in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.3 percent before seasonal adjustment.

The index for energy rose 10.9 percent in March, led by a 21.2-percent increase in the index for gasoline which accounted for nearly three quarters of the monthly all items increase. The shelter index also increased in March, rising 0.3 percent. The index for food was unchanged over the month as the index for food away from home rose 0.2 percent, while the index for food at home fell 0.2 percent.

The index for all items less food and energy rose 0.2 percent in March. Indexes that increased over the month include airline fares, apparel, household furnishings and operations, education, and new vehicles. Conversely, the indexes for medical care, personal care, and used cars and trucks were among the major indexes that decreased in March.

The all items index rose 3.3 percent for the 12 months ending March, after rising 2.4 percent for the 12 months ending February. The all items less food and energy index rose 2.6 percent over the year, following a 2.5-percent increase over the 12 months ending February. The energy index increased 12.5 percent for the 12 months ending March. The food index increased 2.7 percent over the last year. 

This doesn’t need an in-depth analysis. The CPI jump was driven almost entirely by the oil shock created by the war with Iran that sent gas-pump prices rocketing skyward. The price of crude oil remains at or near $100 a barrel even with the cease-fire, thanks to the continuing threat to shipping through the Strait of Hormuz. The only real saving grace in that situation is that the US made itself into a net exporter and can guarantee the continuity of supply for domestic consumers, so there won’t be lines around the block or the rationing seen in the 1970s. However, oil is still sold on global markets, which means that we pay whatever the global market assigns rather than a discount for domestically produced oil. 

One bright spot, relatively speaking, is that the oil shock didn’t hit other categories nearly as hard. Core CPI (less food and energy) only rose to 2.6% year-on-year. The biggest jumps in March outside of energy were for apparel (1.0%) and transportation services (0.6%). Food prices remained unchanged, and grocery prices actually declined, -0.2%, in March. That will likely change in April, however, as fuel prices create more cost for transporting all goods to market and retailers pass those costs to consumers. 

As I mentioned in the Final Word last night, this differs from the inflationary wave seen in the Biden Regency in one significant way. That inflation got triggered by supply-chain crises and a very ill-advised stimulus that boosted demand in the middle of those supply chokes. This is simpler and less prone to escalation. We do not have supply-chain issues at the moment, except in oil and fertilizer, and that mostly impacts countries other than the US. When the price of oil drops, so will this inflationary pressure. It may take a while for those prices to fall even if Iran stops interfering with traffic through the Strait of Hormuz, but when they do, the energy inflation will resolve itself. 

This does create a dilemma for the Federal Reserve, as the Wall Street Journal points out:

Above-target inflation and a cooling labor market have put the Federal Reserve in a tight spot. After several years of shocks that have made businesses and consumers more accustomed to price increases, officials worry that lowering rates too aggressively to shore up the job market could risk sustaining higher inflation.

Aside from oil and tariffs, the Fed is also paying close attention to stubborn services prices. Last month, Fed Chair Jerome Powell said it is “frustrating” that services inflation, excluding housing, moved sideways last year. “We’re not seeing progress there,” he said.

We had a good month in March for job creation, however, even with this inflation. That may well push the Fed into standing pat through the war. That may well be the best that Trump can hope to get from the Fed at the moment. 

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