The Federal Reserve’s preferred inflation gauge surged higher in March as energy and trade disruptions from the Iran war compounded tariff-related price hikes already flowing through supply chains.

Compared to a 2.8% annualized pace of growth in January and February, the personal consumption expenditures (PCE) price index rose 3.5% from a year ago in March. Core PCE inflation, which excludes food and energy costs, increased 3.2% over the year, matching 3.2% growth in February.

Core inflation slowed on a monthly basis, increasing just 0.3% compared to the 0.4% growth in February. Headline inflation nevertheless surged higher on rising energy costs, posting 0.7% growth in March compared to 0.4% in February.

The overall reading arrived in line with consensus forecasts of economists polled by Reuters.

Fed officials voted to hold interest rates steady Wednesday, with inflation concerns rising to the forefront of policy debates.

The Federal Open Market Committee meeting saw three dissents registered by FOMC members, who expressed a preference for striking an “easing bias” from the group’s policy statement. Doing so would have presented a more neutral stance concerning future policy adjustments, instead of implying that the next interest rate move will be a cut.

Speaking to reporters at his final FOMC press conference as Fed chair, Jerome Powell noted Wednesday that policy is positioned in anticipation of progressive economic impacts from the ongoing Middle East conflict while underscoring that the economic toll of the conflict “hasn’t even peaked yet.”

Shifting inflation expectations have caused yields on longer-dated bonds to rise over the past two months, sending average mortgage rates on typical 30-year home loans from around 6.5% at the end of March to around 6.35% through much of April — well above the 6% range where they started the year, according to Mortgage Bankers Association data.

The jump in headline PCE inflation reported Thursday by the Bureau of Economic Analysis was the largest in almost three years, and it comes on the heels of a consumer price index (CPI) update for March that showed record spikes across that inflation gauge also.

War-driven oil supply shocks caused the energy component of the CPI to increase nearly 11% from February to March, the largest monthly increase since September 2005. Headline CPI inflation rose 3.3% in March, its highest level since May 2024.

Perceived labor market fragility also threatens the Fed’s dual mandate to maintain stable prices and maximum employment, but Powell noted Wednesday that the labor market was “still cooling off just a little bit,” as the unemployment rate has remained stable for months.