Inflation Pops, Policy Stays Put

• The average price for a gallon of gasoline rose 17% in March.

• Regional Fed prices received data showed little change last month.

• The scenario should leave monetary policy on hold.

The recent rebound in gas prices shouldn’t force our central bank into action.

This week delivers a key update for investors tracking the Federal Reserve’s monetary policy outlook. The U.S. Bureau of Labor Statistics (“BLS”) will release its March Consumer Price Index (“CPI”), and if you’ve filled up your tank lately, you already know what the headline will say: inflation popped.

According to the Energy Information Administration (“EIA”), the average gallon of gasoline last month cost $3.77. That’s the highest level since late 2022, when inflation was retreating from a four‑decade peak. It also marked a 17% jump from March 2025…  

As the chart above shows, the first quarter typically produces the fastest annualized price growth of the year. But this March blew past the usual 7% seasonal gain. The move pushed the Cleveland Fed’s staff to project CPI could reach 3.3%, a level we haven’t seen since mid‑2024. That shift has stirred Wall Street’s anxieties about whether rate hikes might re‑enter the conversation.

Chairman Jerome Powell has signaled the Fed is willing to give the Iran conflict more time before reacting. Policymakers are hoping the White House can resolve the situation quickly enough to prevent oil prices from staying elevated and feeding inflation. And based on the data I track, the recent jump in energy costs hasn’t yet filtered into broader goods and services prices. That gives the Fed room to stay patient.

But don’t take my word for it, let’s look at what the data’s telling…

To get an idea of what inflation growth might look like each month, I built a gauge using monthly manufacturing and services index data from the Dallas, Kansas City, New York, and Philadelphia Fed districts. These surveys ask businesses whether activity is rising, falling, or holding steady, and then publish indexes to capture the change. Together, these regions represent roughly 32% of national economic output. I focus on the “prices received” components because they serve as a proxy for CPI.

Each district is weighted by its contribution to national growth, giving us a cleaner read on how they influence the overall picture. In March, the combined manufacturing prices‑received index came in at 23.2, up slightly from 22.7 in February. While that’s toward the high end of the recent range, it’s still below the levels we saw in mid‑2025…  

Manufacturing, however, accounts for only about 10% of domestic output. Services matter far more. That sector includes healthcare, education, finance, hospitality — the parts of the economy where most Americans work and spend. My gauge shows the services index slipped from 18.4 in February to 17.1 in March…

Next, I blended the two measures, weighting them by economic importance and their relevance to CPI. Because services dominate the U.S. economy, they carry more sway in the combined reading. The composite came in at 19.3 for March, down from 19.9 in February. Again, still within the recent range and below the mid‑2025 highs…

This matters because it tells the Fed that companies aren’t raising prices on consumers right now. In fact, the details show the opposite. Dallas, New York, and Philadelphia all reported declines in prices received, while Kansas City saw only a slight uptick. The last time we saw a similar pattern was mid‑2024, when inflation was cooling rapidly. That nuance gives policymakers cover to look past the gas‑price spike before making any moves.

So, the last step is to measure the Fed’s interest rate cushion. We can do this by looking at the real rate of interest (effective federal funds rate minus inflation). A positive number means policy is weighing on price growth, while a negative number means rates are stoking inflation. According to the most recent CPI figures, rate hikes aren’t necessary…

In February, the effective federal funds rate was roughly 3.6% while inflation stood at 2.4%. That means about 120 basis points of room before policy hits the so‑called neutral level, where rates neither help nor hinder growth. And since the Fed has managed the real rate to an average of –0.6% since 2000, it implies policymakers have a cushion of much as 180 basis points before reaching that long‑term norm.

Now let’s apply the Cleveland Fed’s 3.3% CPI estimate. Under that scenario, the current rate‑cut cushion shrinks to just 0.3%. But when we factor in the long‑term average, the potential rises to 0.9%.

Bottom line: the margin for rate cuts may have narrowed, but the Fed still has room to stay on hold. That should bolster Wall Street’s confidence that policymakers can ride out the Iran conflict without resorting to hikes. And if the situation resolves sooner than later, the door to lower borrowing costs could reopen. That would free up cash, support economic growth, and help sustain a steady, long‑term rally in the S&P 500.

Five Stories Moving the Market:

President Trump threatened to destroy all of Iran’s power plants if the country’s leaders don’t agree to reopen the Strait of Hormuz by Tuesday evening, ratcheting up pressure on Tehran; the comments came hours after U.S. forces rescued an American aviator trapped in Iran – WSJ. (Why you should care – the White House is expected to hold a press conference about developments in Iran later today)

The Foreign Ministry Offices of Iran and Pakistan stressed that Tehran had never refused to attend talks with the U.S. in Islamabad, calling U.S. media reports on stalled mediation a “figment of imagination” and criticizing the misrepresentation of recent briefings – Hindustan Times. (Why you should care - both sides urged reliance on official statements and reaffirmed their commitment to dialogue)

U.S. President Donald Trump claimed in an interview with Axios that the U.S. is "in deep negotiations" with Iran and that a deal can be reached before his deadline expires on Tuesday – AXIOS. (Why you should care – the White House appears to be pushing its deadline for a resumption of bombing by a full day)

Traffic through the vital Strait of Hormuz has been picking up in the past week, with the seven-day rolling average for transits on Friday reaching the highest since the war started – Bloomberg. (Why you should care – a rebound of transit through the Strait of Hormuz could help satisfy a U.S. requisite for ending the current campaign against Iran)

OPEC+ agreed to raise its oil output quotas by 206,000 barrels per day for May, a modest rise that will largely exist on paper as its key members are unable to raise production due to the U.S.-Israeli war with Iran – Reuters. (Why you should care – the offer could prove to be hollow as those members able to boost increase output are being inhibited from shipping more energy products abroad)

Economic Calendar:

Markets are closed in Australia, China, Europe, and New Zealand

U.S. – ISM Non‑Manufacturing PMI for March (10 a.m.)

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