Key Highlights

  • BLS data shows March CPI surged 3.3% annually, with the energy index up 10.9% and gasoline prices jumping 21.2% month-on-month.
  • Nonfarm payrolls added 178,000 jobs in March per the Bureau of Labor Statistics, but year-to-date monthly average hiring stands at just 68,000.
  • The BEA confirmed Q4 2025 GDP grew only 0.5%, with the advance Q1 2026 estimate due April 30 expected to reflect war-related drag.
  • The Federal Reserve held its policy rate at 3.5% to 3.75% in March; CME FedWatch shows 77.5% probability of no cuts through year-end.
  • Goldman Sachs has raised the probability of a U.S. recession over the next 12 months to 30%, driven primarily by the oil price shock.

Energy Costs Drive the First Measurable Damage

The Iran war's footprint on the U.S. economy is now visible in hard government data, not merely in forecasts and sentiment surveys. The Bureau of Labor Statistics reported that the March consumer price index rose 0.9% month-on-month, pushing the annual headline rate to 3.3%, its highest reading in two years. Energy costs were the primary driver, with the energy index up 10.9% and gasoline prices surging 21.2% in a single month, accounting for nearly three-quarters of the total monthly increase.

The inflation picture holds a critical distinction for policymakers. Core CPI, stripping out food and energy, rose just 0.2% monthly and 2.6% annually, in line with economist expectations. That divergence between headline and core suggests the current inflation shock is predominantly an energy event rather than a broad-based pricing breakdown. Whether it stays that way depends almost entirely on how long the conflict persists.

Labour Market: A Deceptive Rebound

Nonfarm payrolls rose a seasonally adjusted 178,000 in March, reversing a revised 133,000 decline in February and surpassing the Dow Jones consensus estimate of 59,000, according to the Bureau of Labor Statistics. The unemployment rate edged down to 4.3%, though the decline was partly driven by a contraction in the labour force rather than new employment.

The headline number flatters a weaker underlying trend. Job growth has averaged just 68,000 per month from January through March, and the March rebound was substantially driven by 76,000 healthcare sector payroll additions following the resolution of the Kaiser Permanente strike, rather than genuine broad-based demand. Federal government employment fell a further 18,000 in March. Excluding healthcare, the picture is considerably less encouraging.

Economists caution that the March employment strength reflects pre-war conditions, with hiring expected to soften in April as businesses respond to the inflation surge and rising uncertainty. With wage growth now running at 3.5% annually while consumer prices are rising at 3.3%, real wage gains have been effectively erased.

GDP: Entering the War From a Position of Weakness

The Bureau of Economic Analysis confirmed that real GDP grew at just 0.5% annualised in Q4 2025, a sharp deceleration from 4.4% in Q3, with consumer spending and investment providing modest support while government expenditure and exports declined. The economy was therefore already losing momentum before the conflict began in late February.

The BEA's advance estimate for Q1 2026 is due April 30 and will provide the first direct read on war-period output. Goldman Sachs has revised its full-year 2026 GDP forecast to 2%, down half a percentage point from its prior outlook, while the IMF's April 2026 Article IV consultation projected 2.4% growth for the full year, conditional on oil prices declining from their currently elevated levels and the inflationary impulse from tariffs fading. That scenario is now more uncertain given the conflict's trajectory.

The Federal Reserve's Dilemma

The Federal Open Market Committee held the policy rate steady at 3.5% to 3.75% at its March meeting. An FOMC official stated that the economic outlook remains highly uncertain, with risks to both the labour market and inflation tilting in unfavourable directions simultaneously.

Following the March jobs report, futures markets pointed to virtually no probability of a rate move at the April 28-29 FOMC meeting and a 77.5% probability that the Fed will remain on hold through the end of 2026, according to CME FedWatch data. This represents a dramatic repricing from earlier in the year, when multiple cuts were expected. The Fed's dual mandate is effectively in conflict: cutting rates risks embedding energy inflation further; holding rates risks choking off an already weakening labour market.

Supply Chains and the Months Ahead

Beyond the direct energy channel, the war is beginning to register in supply chain metrics. The New York Fed's Global Supply Chain Pressure Index rose notably in March, signalling a meaningful tightening in global supply conditions not seen in several years. Elevated freight and logistics costs typically pass through to goods prices with a lag of two to four months, meaning additional inflationary pressure may not yet be fully reflected in the CPI data.

Goldman Sachs estimates the probability of a U.S. recession over the next 12 months has risen to 30%, driven by the oil price shock, and projects the unemployment rate will rise to 4.6% by year-end as hiring slows in response to compressed margins and weakened demand.

The structural position of the United States, as a net energy exporter following the shale revolution, provides meaningful insulation relative to Europe and Asia. However, the domestic consumer still faces higher pump prices, tighter credit conditions, and a Federal Reserve unable to provide relief. The war has compounded an economy that was already navigating tariff-driven cost pressures and a decelerating labour market. The damage so far is real and measurable. Whether it remains contained is a function of geopolitics, not economics.