Fed's preferred inflation gauge hits 3-year high as gas prices spiked on Iran war

• The PCE index jumped 0.7% in March, the largest monthly gain since June 2022, pushing the annual rate to 3.5% from 2.8% in February, well above the Fed's 2% target
• Gasoline prices surged 24.1% in March due to the Iran war, reaching nearly four-year highs this week and driving the inflation spike
• Core PCE inflation (excluding food and energy) held steady at 3.2% annually, while inflation-adjusted consumer spending rose only 0.2%, signaling slower economic growth ahead in Q2

Summary

Key Inflation Data:

The Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, surged 0.7% in March 2025—the largest monthly increase since June 2022. Year-over-year PCE inflation jumped to 3.5%, the highest level since May 2023, up from 2.8% in February. Core PCE inflation (excluding food and energy) held steady at 3.2% annually, while rising 0.3% monthly.

Primary Driver:

The spike was primarily driven by the Iran war, which caused gasoline prices to surge 24.1% in March according to the U.S. Energy Information Administration, reaching nearly four-year highs. Inflation was already elevated due to President Trump's sweeping import tariffs before the conflict began.

Market Implications:

The data reinforces expectations that the Federal Reserve will maintain elevated interest rates "well into next year." The Fed kept its benchmark rate in the 3.50%-3.75% range on Wednesday, citing rising inflation concerns from the conflict. Both inflation measures remain significantly above the Fed's 2% target.

Economic Impact:

Consumer spending increased 0.9% in March but gained only 0.2% after inflation adjustment, down from 0.3% in February. This suggests a slower growth trajectory for the second quarter, with economists anticipating more pronounced economic fallout from the war ahead.

Data Context:

The Commerce Department's Bureau of Economic Analysis released this data as part of catching up on delayed reports following last year's government shutdown. The figures met economists' expectations and were included in the advance GDP report.