U.S. inflation rose to its highest level in nearly two years in March, driven by a war-related jump in gas prices and rising energy costs, according to the Bureau of Labor Statistics. The all-items consumer price index rose 0.9% in March, pushing the 12-month inflation rate to 3.3%. BLS officials said most of the increase in the headline number came from the surge in energy prices, with food inflation little changed.
The inflation spike coincided with deteriorating consumer confidence as households grappled with higher costs at the pump. The University of Michigan's headline index of consumer sentiment tumbled to 47.6 in April, down 10.7% from the March survey and its lowest on record. Current conditions and expectations indexes also posted double-digit monthly declines.
Energy Prices Drive Economic Anxiety
The survey's director, Joanne Hsu, said, "Survey comments show that many consumers blame the Iran conflict for unfavorable changes to the economy." She also said most of the interviews were completed before the April 7 ceasefire and that the survey primarily reflects conditions from March. Hsu said, "Economic expectations will likely improve after consumers gain confidence that the supply disruptions stemming from the Iran conflict have ended and gas prices have moderated."
Gas prices and energy costs were key drivers of the higher inflation readings and the related economic anxiety. The Financial Times said U.S. inflation rose to its highest level in about two years in March, driven by a historic surge in petrol prices linked to the Iran-related conflict. CNN said the March CPI report showed a war-driven jump in gas prices helped push U.S. inflation to 3.3% last month.
Inflation Expectations Climb Sharply
The drop in sentiment coincided with a sharp rise in inflation expectations. Respondents in the University of Michigan survey saw prices up 4.8% in a year from now, a full percentage point increase from the March reading and the highest since August 2025. The one-year outlook in April 2025 was 6.5% following President Donald Trump's "liberation day" tariff announcement.
The survey also showed five-year inflation expectations rising to 3.4%, up 0.2 percentage point from the prior month and a percentage point below the level of a year ago. The rise in longer-term inflation expectations signals growing concern among consumers about persistent price pressures beyond the immediate energy shock.
Why This Matters:
The war-driven energy shock demonstrates how geopolitical instability directly translates into higher costs for American families and businesses, undermining economic stability through forces beyond domestic policy control. Rising inflation expectations at 3.4% over five years suggest consumers doubt the Federal Reserve's ability to maintain price stability, potentially forcing monetary authorities to keep interest rates elevated longer than markets anticipated. This would increase borrowing costs for businesses and homeowners while slowing economic growth. The collapse in consumer sentiment to record lows reflects real economic anxiety that could dampen consumer spending, which drives two-thirds of U.S. economic activity. Energy price volatility highlights the strategic importance of domestic energy production and supply chain resilience as national security imperatives, not merely environmental policy debates. The ceasefire offers hope for moderation, but the episode underscores the vulnerability of households to external shocks when energy markets remain tight and geopolitical risks elevated.