The ongoing conflict in the Middle East remained the focal point for investors this week, despite a heavy economic data calendar, which included more early reads of March data and minutes from the Fed’s last meeting. Financial markets exhaled a major sigh of relief following the U.S. and Iran agreeing to a two-week ceasefire. Oil prices fell by more than $18 per barrel on the news – its sharpest one-day decline in six-years – with WTI and Brent both sitting just below $100 per barrel. Meanwhile, U.S. equities rallied on Wednesday and have held the gains through Friday, with the S&P 500 looking to end the week up 3.8% – its best weekly showing since May 2025. That said, the situation remains incredibly tenuous, as major issues regarding Iran’s nuclear program and their control over the Strait of Hormuz remain unresolved. 

The March CPI inflation report provided the first glimpse of the effects that the energy shock is having on American households. Headline inflation grew at its fastest monthly rate since June 2022, pushing the year-ago measure to a near two-year high of 3.3% (Chart 1). Unsurprisingly, most of the upward pressure came from a spike in gasoline prices, which rose 21% month/month. But after removing the effects of food and energy, there was little evidence to suggest that higher energy prices are bleeding into the core measure. That isn’t surprising, as it’ll likely take a few months for these effects to show up. What is working to keep core inflation elevated is continued passthrough from last year’s tariff increases as well as sticky services prices. The secondary effects from the energy shock will only compound these lingering price pressures in the months ahead, likely leading to some upward drift on core measures of inflation. 

This is already causing hesitation among some Fed officials on whether they should maintain a cutting bias. The minutes from the Federal Reserve’s March 17-18 meeting showed that a growing group of policymakers felt that interest rate hikes might be needed to counter inflation, particularly if the conflict were to drag on. The key word here being “might”. On balance, “many participants” still have rate cuts in their baseline forecast. The growing divergence suggests that any further move to lower rates isn’t likely to happen until there’s clear evidence that inflation is on a more sustainable path back to the Fed’s 2% target. This is unlikely to happen before September. 

For the time being, the focus will remain squarely on the economic data. While backward looking, the February income and spending figures showed some softening in consumer spending to start the year (Chart 2). However, weather related effects were at least partially to blame for the slowdown. Importantly, March data have shown a rebound in activity, with non-farm payrolls more than reversing February’s pullback and vehicle sales reaching a six-month high. At the same time, roughly half of households have now filed their taxes, with the average refund totaling $3,521 – up $350 from last year. This should provide some near-term cushion to help offset the impact of higher energy costs.