Rising oil and petrol prices linked to the Middle East conflict are expected to lift US inflation, with the March CPI report due on Friday. Traffic through the Strait of Hormuz was reported to be picking up, which may cap crude prices in the short term.
Headline month-on-month CPI is forecast to rise from 0.3% in February to 1.0% in March. If realised, this would be the biggest monthly increase since June 2022, after Russia’s invasion of Ukraine.
The ISM Services Prices Paid index rose from 63.0 in February to 70.7 in March, the highest since October 2022. The one-month increase was the largest since 2012.
AAA daily petrol prices per gallon rose 36.2% in March and continued to rise each day so far in April. Consumer confidence has not yet shown a notable reaction, while the ISM Services employment index was cited as a potential signal of weaker jobs conditions.
Minutes from the March FOMC meeting are due on Wednesday and may show disagreement on the policy outlook. The median 2026 dot released in March was 3.375%, implying one rate cut this year, with assumptions tied to a weak labour market and recent NFP data.
Rising oil prices are again becoming a major concern, pushing WTI crude toward $88 a barrel and putting upward pressure on gasoline. The upcoming March CPI report this week is expected to show inflation remains stubbornly high, with some economists forecasting a 0.4% month-over-month increase. This environment creates significant uncertainty for the market.
We saw a similar situation unfold back in the spring of 2025 when a conflict in the Middle East caused a sudden inflation scare. Back then, the headline monthly CPI was projected to hit 1.0%, a figure not seen since mid-2022. That period of volatility taught us how quickly energy shocks can alter the Federal Reserve’s path.
The impact is already visible at the pump, with the national average for a gallon of gasoline now at $3.75, up nearly 9% in the last month alone. This mirrors the sharp 36.2% price jump we tracked in March of 2025. Such increases act as a direct tax on consumers and could dampen sentiment in the weeks ahead.
Yesterday’s ISM Services report is another warning sign, as the Prices Paid index jumped to 65.1, its highest reading in over a year. This indicates that price pressures are building strongly in the service sector, which is a key focus for the Fed. We are also seeing the employment component of that index begin to soften, suggesting a potentially weaker job market ahead despite recent strong reports.
Given the surprisingly robust NFP jobs report from last week showing over 250,000 jobs added, the Fed is likely to sound more hawkish. The minutes from their last meeting will be closely watched for any hints of delaying rate cuts. According to the CME FedWatch Tool, the market has already priced out a summer rate cut, pushing expectations toward the end of the year.
This renewed inflation and rate uncertainty suggests traders should anticipate higher market volatility. Options strategies that profit from price swings, such as long straddles on the SPX, could become more attractive. The VIX, currently trading around 16, may see a significant spike following this week’s inflation data.
For interest rate products, the risk is that rates will remain higher for longer than previously expected. Traders might consider buying puts on Treasury bond ETFs like TLT or using SOFR options to hedge against the Fed holding off on cuts. The narrative has shifted from how many cuts we will get to whether we will get any at all this year.
In commodities, continued geopolitical tension in the Middle East supports a bullish outlook for oil. Call options on WTI or Brent futures offer a direct way to speculate on further price increases. Traders could also look at options on energy sector stocks, which typically benefit from a rising crude price environment.
