Latest CPI data show inflation jumping. This is what it means for advisors

The latest Consumer Price Index data show a jump in inflation at a time when advisors are closely monitoring the broader economic fallout from the conflict between the U.S., Israel and Iran.

Data from the U.S. Bureau of Labor Statistics released early Friday show that CPI, an important measure for inflation, increased 3.3% over the last 12 months, compared with expectations of a 3.4% increase.

CPI increased 0.9% in March, in line with expectations, after increasing 0.3% in January.

“The first inflation data from after the war in Iran confirmed what everyone was worried about – the oil shock contributed to an extremely high headline CPI number of 0.9% month-over-month,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a statement.

The index for energy rose 10.9% in March, led by a 21.2% increase in the index for gasoline which accounted for nearly three quarters of the monthly all items increase, according to the Bureau of Labor Statistics.

However, Zaccarelli sees positives in Core CPI, or the index for all items less food and energy, which rose 0.2% in March, below expectations of a 0.3%. Core CPI rose 2.6% year over year, below expectations of a 2.7% increase.

“Fortunately, the core inflation number – which strips out more volatile food and energy prices – was only up 0.2% MoM,” Zaccarelli said. “This won’t make consumers happy (as obviously they are buying groceries and filling up the tanks of their cars), but should give the economy some room to absorb the higher energy price shock.”

These sentiments were echoed by Brad Conger, chief investment officer at Hirtle Callaghan. “Today’s CPI suggests that energy is not leaking into core,” he said, in a statement. “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,” he added.

The war with Iran has sent U.S. gas prices soaring in recent weeks amid disruption to shipping in the Strait of Hormuz, and oil and gas production in the region. A ceasefire was reached earlier this week, although shipping traffic through the Strait, a vital conduit for global oil supplies, reportedly remains slow.

Northlight Asset Management’s Zaccarelli noted that the duration of the war matters, as does the “extremely important” Strait of Hormuz. “If the supply shock is temporary then the economy can weather this storm and the Fed will have an opportunity to lower interest rates by the end of the year, but if the inflation shock is more long-lasting they will have no choice but to sit on their hands for the entire year,” he said.

Bret Kenwell, US investment analyst at eToro notes that headline CPI had been enjoying a slow but steady decline until this latest reading, with the 3.3% figure marking its highest reading in nearly two years. In a note, Kenwell also highlighted the latest Personal Consumption Expenditures price index, released this week, which showed a 2.8% increase in February, in line with expectations, and the same number as the prior month. "When paired with the February PCE data we received yesterday, the message is clear: inflation remains sticky — and that optimistically assumes the energy surge proves to be a temporary headwind rather than a lasting recalibration," he said. "While this may not justify higher interest rates from the Fed, it should keep policymakers on pause unless we see a more notable deterioration in the labor market or the broader economy."

Last week the latest jobs numbers came in better-than-expected, decreasing the likelihood of a rate cut from the Federal Reserve anytime soon, despite pressure from President Donald Trump to lower interest rates.

In March the Federal Reserve kept its policy rate steady at 3.5% to 3.75%. The central bank made three consecutive rate cuts last year, and has been urged to slash rates further by Trump. 

The S&P 500 index edged up 0.06% on the latest CPI data, while the Dow Jones Industrial Average is down 0.3%.