Inflation was cooling. Now the Iran war could push it back to 2024 levels.

The ongoing conflict in Iran is expected to have a significant impact on the war against inflation, potentially leading to a major setback. Experts predict that the Consumer Price Index (CPI) for March will show a 3.3% annual increase in prices, the highest rate of inflation since May 2024. This marks a nearly 1 percentage-point jump from February and is largely attributed to the surge in energy prices caused by the war.

According to Oxford Economics, the war on energy prices could push headline CPI inflation above 3% in March and above 4% by April. The U.S. has experienced the largest one-month increase in fuel costs since at least 1957, leading to higher prices for a wide range of goods and services. The impact of the conflict is expected to persist for months, even with the recent ceasefire between the U.S. and Iran.

The rise in fuel prices is likely to result in increased costs for transportation and production, which could in turn affect the prices of other goods, including food. This phenomenon, known as the “rockets and feathers” principle, suggests that energy prices tend to rise quickly during supply disruptions but decline more slowly after the crisis ends.

Economists warn that the effects of higher energy prices could have long-lasting consequences for consumers and businesses alike. Consumers have already paid an additional $8.4 billion in fuel costs since the start of the Iran war, with other goods and services also facing price hikes. This could put pressure on household budgets and potentially impact consumer spending, which accounts for a significant portion of the economy.

Businesses are also feeling the pinch of higher energy prices, as well as disruptions to key supplies passing through the Strait of Hormuz. The increased costs of shipping and production could lead to higher prices for goods like beef, as ranchers face rising expenses.

In terms of interest rates, consumers and businesses may not see a reprieve anytime soon. The Federal Reserve is expected to grapple with higher inflation and a fluctuating labor market, potentially leading to a future rate hike. While the impact of the Trump administration’s tariffs has lessened, with the effective tariff rate now at about 8%, economists suggest that most of the tariff pass-through has already occurred.

Overall, the Iran war is likely to have far-reaching implications for the economy, with inflationary pressures expected to persist in the coming months. Consumers and businesses will need to navigate higher costs and potential disruptions as they adjust to the new economic landscape shaped by the conflict.