Inflation may jump by most in nearly four years as gas prices spike

WASHINGTON– Soaring gas prices are expected to produce higher inflation when the government releases consumer prices for March on Friday, likely unsettling inflation fighters at the Federal Reserve and compounding policy challenges from rising costs for the White House.

Inflation likely rose to 3.4% in March from a year ago, economists say, which would be a sharp increase from 2.4% in February. On a monthly basis, prices are expected to have increased 0.9% in March from the previous month, according to a survey of economists by data provider FactSet. This would be the largest monthly increase since 2022.

Until now, inflation had been on a slight moderating trend since last fall. A 3.4% figure would be the highest in nearly two years and well above the Fed’s 2% target.

“There’s going to be a headline shock here,” said Michael Metcalfe, head of macro strategy at State Street, which produces PriceStats, a measure of inflation culled from millions of online prices. Their data suggests that inflation could jump 1.5% in March alone compared to February.

Excluding the volatile food and energy categories, core prices are expected to have increased 2.7% in March from a year earlier, up from 2.5% in February. From February to March, core prices are expected to have increased 0.3%, a faster pace than is consistent with the Fed’s target.

Gas prices soared about 20% in March, a move that undermines consumers’ ability to spend on other goods and services and, therefore, could also slow economic growth. At least in the short term, many Americans can make only limited changes to their daily driving habits, which are largely determined by where they live, shop and work. As a result, most people will pay higher prices for gasoline and potentially reduce their consumption elsewhere.

Gas prices averaged $4.17 per gallon nationwide Thursday, up 69 cents from the previous month.

The big question for consumers and the economy is whether the surge in oil and gas prices will create a lasting, broader inflationary shock, similar to what occurred in the aftermath of the pandemic in 2021-2022. Inflation peaked at 9.1% in June 2022, as COVID-19 strained supply chains and several rounds of stimulus checks increased consumer demand. Prices of groceries, furniture, restaurant meals, and many other goods and services have skyrocketed.

This time, economists say the job market and consumer spending are weaker, and no large stimulus checks are being issued by the government to stimulate demand. The unemployment rate is low, at 4.3%, but businesses aren’t scrambling to hire like they were when the economy emerged from the pandemic, leading many companies to offer big pay raises to attract and retain workers.

Rapid wage increases and solid income growth helped consumers cope with rising prices resulting from supply chain disruptions due to the pandemic, and fueled a surge in demand that led many companies to raise prices further.

“That’s where the real difference is, is that we’re nowhere near having as strong demand,” said Alan Detmeister, an economist at UBS. In 2021 and 2022, revenue growth “has increased very sharply. We’re not seeing that now,” he added.

Detmeister thinks the best comparison would probably be 1990-91, when rising oil and gas prices resulting from Iraq’s invasion of Kuwait contributed to a recession but did not lead to higher inflation, partly because of weak consumer spending.

The impact of soaring gas prices on inflation is in some ways similar to that of President Donald Trump’s tariffs, in that their effect will largely depend on the size and duration of the increase.

For now, economists expect that in March and April, the impact will be largely limited to energy-intensive industries, such as airlines, package delivery services and public transportation. Overall, the U.S. economy is much less dependent on oil and gas than it was in previous decades.

Yet the sharp rise in inflation – which is expected to continue for several months – has already changed the debate within the Federal Reserve, which began the year expecting to cut its key interest rate at least several times. But a growing number of Fed officials are now willing to consider raising rates if underlying inflation does not slow significantly.

Most officials are almost certain to support keeping the Fed’s key interest rate unchanged in the coming months, at around 3.6%, as they assess developments in the economy. Investors now do not expect the Fed to cut rates before the end of 2027.

Rising gas prices are tricky for the Fed because they can also slow growth by weighing on consumer spending, potentially causing layoffs. The Fed would generally cut rates to encourage more spending if unemployment rises, while it would raise rates to combat inflation.

Higher oil and gas prices will also likely drive up food prices, creating more pain for consumers who have already absorbed about a 25% increase in food prices since the pandemic. Almost all groceries are shipped by diesel-powered trucks, and diesel fuel prices have risen even more than regular gasoline prices. However, analysts do not expect food prices to accelerate for a month or two.