We will be seeing clear effects of the war in the March inflation data. Most obviously, the gas price index will rise by close to 20 percent. By itself, this increase would add 0.6 percentage points (p.p.) to the monthly inflation rate. There may also be some limited effects from companies imposing energy surcharges to cover higher transportation costs, but that will more likely show up in April’s data.

There was also a surprising amount of inflationary pressure showing up at earlier stages of production even before the war started. The final demand index in the Producer Price Index (PPI) rose 0.7 percent in February after rising 0.4 percent in January. The food component of the PPI rose 2.4 percent in February, although it had fallen 1.4 percent in January. We are likely to see the food component of the CPI again show a large increase in March, after rising 0.4 percent in February.

Import prices were also rising rapidly even before the war. Non-fuel import prices rose 1.1 percent in February, after rising 0.8 percent in January. We will see these costs passed on in March and subsequent months.

The year-over-year inflation rate in the overall CPI was 2.4 percent in February and 2.5 percent in the core index. The overall year-over-year figure is likely to be north of 3.0 percent in March, with the core index rising to 2.7 percent. For the month, the core index will be close to 0.5 percent, while the overall index will be 1.0-1.1 percent.

Food Prices to Rise Rapidly in March

Food prices rose 0.4 percent in February and were up 2.4 percent over the last year. It is too soon to see much impact from the higher transportation costs and higher fertilizer prices resulting from the war, but prices were already rising rapidly at the wholesale level in February, even before the war. A huge jump in fruit and vegetable prices was a main factor in the increase, likely connected to the loss of immigrant farm workers. The price of imported foods also rose rapidly in February, jumping 0.8 percent after rises of 0.4 percent and 0.5 percent in the prior two months.

The food index will likely rise 0.4-0.5 percent in March. This will put the year-over-year increase in the 2.4-2.5 percent range.

Energy Prices to Rise Sharply in March

As noted, the index for gas is likely to rise by close to 20 percent in March, due to the impact of higher oil prices. However, gas has less than half the weight in the CPI energy index. The weight of electricity is almost as large. The electricity index had an anomalous 0.7 percent drop in February. That will likely be reversed in March. The rise in the overall energy index will be close to 10.0 percent for the month.

Rent Will Continue to Be a Moderating Factor

After pushing inflation higher in the pandemic recovery, the rate of rental inflation has slowed sharply. Both the rent proper index and the owners’ equivalent rent index rose 0.2 percent in February. They are up 2.9 percent and 3.2 percent, respectively, over the last year. With indexes of marketed units showing even lower inflation, the rental indexes are likely to again increase by just 0.2 percent in March. This is somewhat slower than their pre-pandemic rate of inflation.

The inflation in rent and house prices was largely a pandemic story. Rents had lagged inflation in the years after the collapse of the housing bubble. They began to outpace inflation by a bit more than a percentage point annually in the middle of the last decade, as the plunge in construction following the collapse of the bubble led to a rise in rents. Building was starting to catch up with demand growth, but the jump in remote work swamped new supply during the pandemic. This was a worldwide story.

Now that new building has again caught up with demand, rent and real house prices are likely to edge lower. But the process will be slow and uneven.

Inflation in Medical Services Will Continue to Be a Problem

The medical services index increased 4.1 percent over the last year and 0.6 percent in February. The February figure was likely somewhat of an anomaly, which should mean slower growth in March. One factor that will push the index higher is the health insurance index. It declined by 1.1 percent in February; this will be partially reversed in March.

Transportation Services Will Show Somewhat Higher Inflation in March

The transportation services index, which accounts for 6.4 percent of the CPI, will likely rise somewhat faster than the 0.2 percent increase in February. In February, a 1.4 percent rise in airline prices was largely offset by a 0.3 percent drop in the index for auto insurance, which has three times the weight. While airline prices will not rise as much in March (it’s too early to see much impact from higher fuel costs), it is unlikely auto insurance prices will fall again.

New and Used Vehicles Likely to Add to Inflation in March

In February, the new vehicles index was flat while the used vehicle index fell by 0.4 percent. Year-over-year the new vehicle index is up 0.5 percent, while the used vehicle index is down by 3.2 percent. These indexes will likely show more inflation in the months ahead. In January and February, the price of imported vehicles rose by 0.3 percent and 0.2 percent, respectively. This is before the impact of tariff increases, which would add to the price rises. This will show up at the retail level at some point.

Restaurant Prices Continue to Rise at a Moderate Pace

The index for restaurant meals, which accounts for 5.4 percent of the CPI, rose 0.3 percent in February and is up 3.9 percent over the last year. The index is likely to rise again at a 0. percent rate. This reflects higher food prices and rising wages, as well as disruptions created by the loss of immigrant workers.

Inflation Will Look Bad in March

It is virtually certain that the CPI will show a big jump in March driven by higher gas prices. There were already serious grounds for worrying about inflationary pressure based on the February producer and import price indexes.

These indexes were showing clear evidence of rising inflation. While the impact, absent the war, likely would have been moderate, the price increases related to the war are a much bigger deal. How large and sustained they end up being depends on the course of the war and how quickly oil production and shipping from the region can return to something resembling normal.