The figures come after eurozone inflation rose to 2.5 per cent in March from 1.9 per cent the previous month, marking its highest level in two years, and sparking interest rate hike predictions.

The rise in the US was the biggest monthly change since June 2022, driven by a surge in oil prices amidst the Middle East conflict. US gas prices increased 21.2 per cent from February to March while prices for fuel oil jumped more than 30 per cent, the biggest rise since February 2000.  

“The escalation in the Middle East, following US-led military strikes on Iran and subsequent retaliation across the region, has pushed US oil and gasoline prices higher, reinforcing how energy remains the primary transmission channel into headline inflation,” Arielle Ingrassia, associate director, investment specialist at UK wealth manager Evelyn Partners said. “A two-week US-Iran ceasefire has been agreed, but it remains fragile, with ongoing violations, continued fighting in Lebanon, and the Strait of Hormuz still largely closed, keeping energy flows disrupted and oil prices elevated.”

“For now, this looks like an energy-led reacceleration with contained spillovers, rather than a fully entrenched second-round inflation dynamic,” Ingrassia continued. “However, if energy prices remain elevated, the risk is that these effects broaden over time through costs, pricing and ultimately inflation expectations.”

“From a policy perspective, this reinforces a cautious Fed stance. Recent communication has emphasized patience, with policymakers in no rush to ease amid elevated inflation uncertainty. Markets have pushed back near-term rate cut expectations, with some brief concern around further tightening, although gradual easing later in the year remains the base case. The balance of risks is shifting toward fewer and later cuts, leaving the Fed firmly in wait-and-see mode,” Ingrassia said.

“While these numbers are for March, the influence from the Iran conflict is far from over. For example, gasoline prices were up 21 per cent in the report, and yet approximately 40 per cent overall since the conflict began,” John Kerschner, global head of securitized products and portfolio manager at Janus Henderson Investors, added. “So expect more increases coming there. Likewise, food prices were actually flat this morning, but given the increase in diesel prices, it is only a matter of time before they bleed through to effect downstream components like food.”

“Even given the better-than-expected print this morning, the Fed faces a major dilemma over its next few meetings. Does the Fed look through this hopefully short-term aberration in the inflation numbers or do they actually consider a hike in rates when economic growth seems to be somewhat stalling?” Kerschner continued. “The answer obviously lies in the length of the conflict, which honestly, no one can accurately forecast at this moment. What we do know is that even if the Strait of Hormuz opens today, energy prices will be elevated for months and potentially years to come.”

Kerschner highlighted that the bond market is telling us that the US Federal Reserve will continue to talk tough on inflation but will carry a stick the size of a twig. “The markets are pricing in status quo on Fed Funds for at least the next 10 Fed meetings. But market participants forget at their peril the heuristic that a 10 per cent increase in oil prices boosts headline CPI by 25 to 30 bps and core by 4 to 5 bps. If oil stays at these levels, 40-50 per cent higher than pre-Iran for a considerable time, we are looking at headline CPI prints that could be north of 4 per cent, and even core numbers in the 3 per cent zip code, wiping away much of the progress the Fed has made on inflation over the last four years."

Meanwhile, Brad Conger, chief investment officer at Hirtle Callaghan, believes that the figures suggest that energy is not leaking into core: “Perhaps there is more slack in non-energy items than we thought. Our bias is to own duration given the weakness in labor and housing.” 

Alexandra Wilson-Elizondo, global co-CIO of multi-asset solutions at Goldman Sachs Asset Management noted that the US economy is far less oil-intensive than it was in the 1970s, and a 10 per cent sustained rise in oil adds only about 5 bps to core. Wage growth has decelerated to levels consistent with the inflation target, and long-term inflation expectations remain anchored. She believes the Fed will look through the energy-driven noise as long as these factors hold. “The Fed has room to be patient, and every reason to do so. Today's number buys the Fed time, but the real test lies ahead," she said.