United States inflation accelerated in March while economic growth undershot expectations, as a surge in energy prices linked to the Iran conflict complicated the Federal Reserve’s policy outlook and squeezed household budgets.
Data released yesterday by the U.S Commerce Department showed the core personal consumption expenditures (PCE) price index — the Fed’s preferred inflation measure — rose 0.3% for the month, lifting the annual rate to 3.2%, in line with market forecasts.
Headline inflation, which includes food and energy, increased 0.7% in March, pushing the annual rate to 3.5%, the highest since mid-2023.
Driven largely by energy costs, the figures underscore a renewed inflationary impulse.
Gross domestic product (GDP) expanded at an annualised rate of 2% in the first quarter, up from 0.5% in late 2025 but below the 2.2% expected by economists, according to the Bureau of Economic Analysis.
The inflation spike coincides with a sharp rise in fuel prices, with data from the U.S Energy Information Administration showing that average petrol prices climbed more than 24% in March, with pump prices exceeding US$4 a gallon for the first time in nearly four years, reflecting supply disruptions tied to the Iran war.
Despite the inflation pressure, the labour market remains historically tight.
The U.S. Labor Department reported initial jobless claims fell to 189,000 in the week to April 25, the lowest level since September 1969 and well below expectations, indicating employers continue to retain staff in a low-hiring, low-firing environment.
Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.9% in March in nominal terms but only 0.2% after adjusting for inflation, which suggests that higher prices are eroding purchasing power.
Over the quarter, spending grew at a 1.6% pace, while outlays on goods declined slightly.
The composition of inflation shifted towards goods, which rose 1.4% in March, driven by an 11.6% jump in energy-related categories, while services inflation remained comparatively subdued at 0.3%.
Business investment provided some support to growth, with spending on equipment and structures — including artificial intelligence-related investment — rising more than 10% during the quarter.
Government spending also contributed, increasing 4.4%, including a 9.3% rise at the federal level.
The data follow the Federal Open Market Committee’s decision this week to hold its benchmark interest rate steady in a 3.50 to 3.75% range, with dissent among policymakers over the future direction of rates.
Markets have since scaled back expectations for near-term rate cuts, as inflation remains above the Fed’s 2% target for a fifth consecutive year.
Economists expect the inflationary effects of higher energy prices to weigh more heavily on growth in the second quarter, raising the risk of a prolonged period of subdued expansion alongside elevated price pressures.
