Last week’s jobs report looked reassuring at first glance. Payrolls rose by 178,000 in March and the unemployment rate edged down to 4.3%. But the details were softer than the headline. January and February payrolls were revised down by a net 7,000, the labor force shrank by 396,000, participation slipped to 61.9%, and the employment-to-population ratio fell to 59.2%. The number of marginally attached workers jumped to 1.94 million, including 510,000 discouraged workers. Wage growth also cooled, with average hourly earnings up just 0.2% on the month and 3.5% from a year earlier. Annual wage growth is down from 3.8% in February. Meanwhile, the three-month average payroll growth was only 68,000. That is not a labor market that has reaccelerated. It is a labor market that still looks stalled.
That matters because this week’s focus shifts from jobs to inflation. The key releases are the February Personal Income and Outlays report, which includes the Fed’s preferred PCE inflation gauge, and the March CPI report. In practical terms, February PCE will give us the last clean inflation read before the latest Middle East oil shock, while March CPI will be the first more timely look at whether higher energy costs are beginning to show through in consumer prices.
The inflation story is now being hit from two directions. First came tariffs. Now comes oil. A new San Francisco Fed letter makes an important point that is easy to miss: a tariff shock does not push every part of inflation in the same direction at the same time. Their estimates suggest that a 10% increase in tariffs lowers headline inflation by 1 percentage point in the first year because energy prices initially fall as demand weakens. Headline inflation can initially fall because weaker demand pushes energy prices down, but goods and then services inflation rise later. Goods inflation later peaks around 1.2 percentage points higher in year 2, while services inflation peaks about 0.6 percentage points higher in year 3 and remains elevated into year 4. So yes, tariffs can temporarily push energy prices lower by slowing demand.
That nuance matters even more now that oil has moved sharply higher because of the Middle East conflict. The San Francisco Fed research implies that tariff-driven weakness in energy prices can offset some inflation pressure at first, but an outright oil shock works in the opposite direction. That is why the inflation outlook now looks less comfortable than it did just a few weeks ago. The economy was already dealing with delayed tariff pass-through into goods and services. Higher oil prices add a more immediate boost to headline inflation on top of that.
Housing should still provide some relief, but probably not enough. The index for OER in February was up 3.2% year over year, down from 3.3% in January. The index for Rent of primary residence in February was up 2.7% year over year, down from 2.8% in January. Zillow forecasts a 2.4% year-over-year increase in Owners’ Equivalent Rent and a 2.2% increase in Rent of primary residence by year’s end. That suggests shelter disinflation should continue. But cooler housing inflation may no longer be enough to offset renewed upward pressure from energy and tariff-sensitive goods.
For the Fed, the message is uncomfortable but fairly clear. Policymakers left rates unchanged in March at 3.50% to 3.75%, projecting higher inflation. At the same time, Fed Chair Jerome Powell said higher energy prices would lift overall inflation in the near term and emphasized the unusual uncertainty around the outlook. That points to a Fed that is more likely to stay on hold than to rush into cuts.
So the setup for this week is straightforward. The labor market is not collapsing, but it is soft enough to keep downside growth risks alive. Inflation, meanwhile, faces fresh upside risks from tariffs and oil even as housing slowly cools. That leaves the Fed stuck. Not because it wants tighter policy, but because inflation may remain too firm to justify easier policy. If this week’s inflation data leans hot, the most likely result is not a rate hike. It is a longer pause, with financial conditions staying restrictive even as the labor market continues to lose momentum. For households and businesses, it likely means the borrowing costs that matter most will stay elevated for longer.
