Energy prices caught fire in March - and it's reshaping what the Fed does next. The monthly inflation jump of 0.9% was the biggest spike since early 2022, pulling the annual rate up to 3.3% from February's 2.4%.
Markets had been betting on two rate cuts this year. Those expectations just got cut in half.
The conflict that started in late February sent oil markets into overdrive, and that shock is now showing up in the hard data. Gas prices surged 18.9% in a single month while fuel oil jumped 44.2%.
The energy component alone - up 12.5% - pushed roughly 0.8 percentage points onto the monthly number. That's one category doing almost all the damage.
The good news: core inflation stayed reasonable at 2.6%, and shelter costs rose just 0.3% for the month. Food prices were flat, with eggs actually falling 3.4%.
The bad news: toys hit their highest monthly jump in five years at 2.3%, and airline fares climbed 2.7% - early signs that the energy shock is bleeding into other categories.
The inflation path gets worse before it gets better. Analysts forecast headline CPI pushing toward 3.6% in April and May as energy costs keep filtering through.
But there's a ceiling on this spike. The job market and consumer spending are weaker than they were in 2022, and there are no stimulus checks fueling demand this time around. That limits how far and how fast prices can spread beyond energy.
A ceasefire was established, but tensions remain fragile. If oil spikes again, the one remaining rate cut priced into markets could disappear entirely.
The Fed's response depends on whether energy prices retreat or stay elevated. One more hot CPI print and rate cut hopes are dead for 2026.