The War Delivers a Spike in the CPI

It's yet another example of how this administration is making life harder for folks already struggling to make ends meet.

The CPI rose 0.9% in March, pushed up by a war-induced, energy-price increase of 10.9%. On a yearly basis, inflation rose 3.3%, almost a full point above February’s prewar rate of 2.4%. The gas price rose 21.2% over the month and 18.9% over the year. Core inflation, which omits energy and food prices, came in at a much milder 0.2% (m/m) and 2.6%, y/y, both slightly below expectations.

The energy-price-driven monthly spike is the sharpest since June 2022, when Russia’s invasion of Ukraine also shock global energy prices.

Other war-impacted prices include airfares, up 2.7% for the month and 14.9% yr/yr. That’s a cost felt by the subgroup of consumers who are flying, but a much more pervasive “price” in the economy is wages. Combining the impact of the March spike in prices with the recent slowing of nominal wages, we see that real hourly earnings were down 0.6% in March for all private-sector workers and down 0.7% for mid/lower-wage workers. On a yearly basis, the comparable growth rates were 0.2% and 0.1%, compared to 1.3% and 1.2% last month.¹

This is a sharp and impactful decline in the buying power of the hourly wage, something already cost-stressed consumers will feel. But because we’re dealing with noisy, monthly data, the question is: how long will these pressures last?

As I wrote yesterday, that’s a function of how the turmoil in the Persian Gulf plays out in coming weeks and months, the extent to which Iran maintains controls the chokepoint of Hormuz—a control that this benighted war delivered to them—and how long it will take damaged energy infrastructure to come back online.

This is, as I said, not the flipping off an off-on switch, and while a ceasefire is certainly welcomed, what we’re seeing in real time suggests the March price spike will not reverse right away, but, assuming the ceasefire holds, will hopefully fade over the next few months.

That said, the idea that President Trump has turned the the buying power of the American workers’ paycheck over the Iranian regime is perhaps one of his most destructive and shocking actions, and that’s a high bar indeed.

Under the hood:

—Grocery prices fell slightly last month, a welcome change, down 0.2%, and up 1.9% over the year, down from 2.4% in February. My expectation is that the war’s impact on trucking costs—diesel fuel is up over 50% since the war started and 80% of our food is delivered by trucks—and other inputs (fertilizer, much of which flows through the SoH), will add pressure to this component in coming months.

—Housing inflation continues to ease, back to its pre-pandemic levels, which, given its heavy weight in the index, is helping to keep overall inflation—aside from the war shock—in check.

—Readers know I’ve been worrying about core services (ex-housing) inflation as it has been a) pretty high and sticky, and b) not obviously connected to tariffs, so a sign of underlying price pressures. Here’s that series on a 6-month annualized basis. It’s jumpy and I’m not convinced it’s out of the woods, but it’s tracking pretty close to pre-pan levels, which is a good sign.

Putting that pretty-good-under-the-hood news next to the very bad war effects raises, once again, the own-goal kick proclivities of the Trump admin’s economic agenda. In case after case—tariffs, deportations, budget cuts to key services, war—their decisions make life more expensive and wage-buying-power less strong. The highly resilient U.S. economy can fight back for only so long.

1. BLS uses CPI-W to deflate the production, non-manager wage; I use the CPI-U.