US inflation expected to hit a two-year high in March as crude oil erases two years of disinflation progress

Crude oil prices climbed nearly 50% in March as conflict between the United States, Israel, and Iran escalated and the Strait of Hormuz effectively closed.

The March CPI report, due from the Bureau of Labor Statistics, is expected to reflect that shock directly, with headline inflation forecast to reach 3.3% annually, its highest level since mid-2024, and a 0.9% monthly increase that would be the largest single-month jump in over a year. Two years of disinflation progress may be interrupted by six weeks of geopolitical shock.

Oil Shock Drives US CPI Inflation Report Higher

Economists anticipate that the US CPI inflation report will reflect a 0.9% month-over-month increase, a notable jump from the 0.3% rise recorded previously. On an annual basis, inflation is projected to climb to 3.3%, marking its highest level since mid-2024 and up from 2.4% in February.

The expected spike in the US CPI inflation report is closely tied to energy markets, particularly the sharp rally in crude prices. Since late February, when conflict intensified involving the United States, Israel, and Iran, oil benchmarks have surged dramatically.

West Texas Intermediate crude oil has risen roughly 40% since the onset of the conflict, despite a partial pullback following a temporary ceasefire announcement. In March alone, prices climbed nearly 50%, moving from around $67 per barrel to close to $100.

This surge is expected to be the dominant force shaping the US CPI inflation report, reinforcing how sensitive inflation remains to global energy shocks.

Core Inflation Remains More Stable

While headline figures in the US CPI inflation report are set to jump, core inflation—which excludes volatile food and energy prices—is expected to remain relatively contained.

Forecasts suggest core CPI will rise by 0.3% on a monthly basis and 2.7% year-over-year. Analysts argue that this indicates underlying inflation pressures have not yet fully absorbed the oil-driven spike.

According to analysts at TD Securities, “The recent surge in crude prices will be the main factor behind the 0.9% monthly jump in the US CPI inflation report. The annual rate is expected to rise sharply to 3.3%, marking a two-year high.”

They added that “core inflation should remain somewhat insulated for now, with gradual price increases continuing across goods due to tariff pass-through effects.”

Geopolitics Overshadow Inflation Data

Despite the anticipated jump in the US CPI inflation report, market participants may interpret the increase as temporary—provided oil prices stabilize.

Much will depend on developments in the Middle East, particularly the fragile ceasefire between the United States and Iran and the strategic importance of the Strait of Hormuz. Any disruption to this key shipping route could sustain elevated oil prices, prolonging inflationary pressures reflected in future US CPI inflation report releases.

If tensions ease and crude prices retreat, investors may look past the March spike in the US CPI inflation report as a short-term anomaly rather than a structural shift.

Federal Reserve Faces Policy Dilemma

The latest US CPI inflation report arrives at a delicate moment for the Federal Reserve, which has been weighing the timing of potential interest rate cuts.

Minutes from the Fed’s March meeting reveal that policymakers are increasingly cautious, with several officials expressing concern that inflation could remain elevated for longer than expected.

A majority of participants highlighted the risk that higher energy costs could feed into broader price pressures, a dynamic that the US CPI inflation report may begin to reflect.

However, not all analysts believe the Fed will react aggressively. Economists at Brown Brothers Harriman noted that “if underlying inflation excluding energy remains stable, the Fed may choose to look through the oil shock rather than respond with tighter policy.”

Market Expectations and Currency Impact

Current market pricing suggests a roughly 75% probability that the Fed will keep interest rates unchanged by year-end, a sharp increase from just weeks earlier, according to data from the CME Group FedWatch Tool.

Even so, a stronger-than-expected US CPI inflation report could shift sentiment—particularly if accompanied by renewed geopolitical tensions or further increases in oil prices.

In such a scenario, the US dollar could strengthen, putting downward pressure on the EUR/USD currency pair. Conversely, if oil prices decline steadily, the impact of the US CPI inflation report on currency markets may be muted, allowing the euro to maintain its recent gains.

Technical Outlook Adds Another Layer

From a technical perspective, analysts suggest that EUR/USD has recently shown bullish momentum. According to FXStreet analyst Eren Sengezer, the pair has broken above a key descending trendline, supported by improving momentum indicators.

Key resistance levels are seen near 1.1730 and 1.1800, while support lies around 1.1650. These technical factors may interact with the US CPI inflation report, amplifying market reactions depending on the data outcome.

Bigger Picture: Oil, Not Inflation, Holds the Key

Ultimately, while the March US CPI inflation report is expected to show a notable uptick, its market impact may be limited unless supported by sustained changes in oil prices.

Investors are increasingly focused on the broader geopolitical landscape rather than a single data release. The trajectory of crude oil and the stability of key supply routes will likely play a more decisive role in shaping inflation expectations than the March US CPI inflation report alone.

For now, the data serves as a reminder that inflation’s path remains uneven, with external shocks still capable of reversing progress and complicating the global economic outlook.