Middle East conflict drives inflation surge in early 2026
The U.S. Consumer Price Index (CPI) for All Items saw a significant increase of 0.9% over the month in March, a notable jump from the 0.3% increase recorded in February. This surge in March was primarily fueled by a staggering 21.2% month-over-month increase in gasoline prices, directly reflecting the impact of the Iran war. Annually, the all-items index climbed by 3.3%, with the gasoline index alone soaring by 18.9%. This March over-the-year rise marked the fastest pace since May 2024. Excluding volatile food and energy components, the all-items index rose 2.6% over the year in March, a slight uptick from 2.5% in February. The energy index increased by 12.5%, while the food index rose by 2.7%.
Meanwhile, the U.S. Producer Price Index (PPI) for final demand increased by 0.5% over the month in March, maintaining the same pace as February. This increase was largely attributed to final demand goods, as prices for final demand services remained unchanged. The rise in the final demand goods index, in turn, reflected a substantial increase in energy prices, particularly gasoline, diesel fuel, and jet fuel, exacerbated by the ongoing conflict in the Middle East. Over the year, the final demand index surged by 4.0%, representing its fastest increase since early 2023.
Further down the supply chain, the index for intermediate demand for processed goods climbed by 2.6% in March, its fastest growth since mid-2022. Conversely, the index for unprocessed goods saw a decline of 2.6%. The services index edged down by 0.1%. Processed energy goods experienced a significant rise in March, mirroring the increasing prices of gasoline, diesel, and jet fuel. In contrast, unprocessed energy goods declined, reflecting a drop in natural gas prices.
Turning to broader economic indicators, real gross domestic product (GDP) in the U.S. expanded at an annual rate of 0.5% in the fourth quarter of 2025, according to the third estimate released by the U.S. Bureau of Economic Analysis. This real GDP figure was revised downwards by 0.2 percentage points from the second estimate, primarily due to a downward revision in investment. At an industry level, the GDP increase was driven by a 2.3% rise in real value added for private services-producing industries, partially offset by decreases of 7.8% in government and 1.8% in private goods-producing industries. Key contributors to the real GDP growth included wholesale trade, information, and health care and social assistance. Real gross domestic income (GDI), an alternative measure to GDP, came in at 2.6%, setting the average of real GDP and real GDI at 1.5%.
Focusing on regional performance, Arizona’s real GDP increased by 1.5% at an annual rate from the third to the fourth quarter of 2025, as per the Bureau of Economic Analysis’ April 9th release. This performance placed Arizona tied for 6th nationally alongside Michigan, both within the highest quintile. Wholesale trade was the largest contributor to Arizona’s GDP, adding 0.56 percentage points, followed by Information, contributing 0.53 percentage points. Conversely, Government showed the largest decrease in state GDP for Arizona, detracting 0.68 percentage points, followed by Manufacturing, with a 0.11 percentage point decrease. Nationally, North Dakota recorded the largest increase in state GDP with 3.8% growth, while the District of Columbia ranked last with a decline of -8.3%.
Arizona’s personal income also saw a healthy increase, rising at an annual rate of 3.4% in the fourth quarter, placing it in the top quintile. Personal income grew in 47 states and the District of Columbia, with Hawaii leading the nation with an impressive 41.5% growth. In stark contrast, North Dakota experienced the most significant decrease in personal income, falling by 4.0%. Nationally, current-dollar personal income increased by $217.9 billion, or 3.4% annually. Earnings rose in 43 states, ranging from 5.9% in Massachusetts to -7.1% in North Dakota. Property income increased across all 50 states and the District of Columbia, ranging from 2.6% in Wyoming to 0.9% in West Virginia.
Regarding employment, month-over-month state unemployment rates in January were higher in one state and stable in the remaining 49 and the District of Columbia, according to the Bureau of Labor Statistics’ April 8 release. Arizona’s seasonally adjusted unemployment rate increased by 0.1 percentage points over the month to 4.5%. Hawaii and South Dakota shared the lowest jobless rates in January at 2.2% each, while the District of Columbia reported the highest unemployment rate at 6.7%. Over the year, 14 states and the District of Columbia saw unemployment rate increases, with Delaware experiencing the largest rise (+1.3 percentage points). The only decreases over the year were observed in Indiana and Ohio (-0.5 percentage points each).
Total nonfarm employment in Arizona decreased by 5,400 jobs year-over-year in February, with the seasonally-adjusted unemployment rate rising a tenth of a percentage point to 4.6%. The U.S. seasonally-adjusted unemployment rate similarly increased a tenth of a percentage point, reaching 4.4%. Arizona’s non-seasonally adjusted total nonfarm employment, however, increased by 31,200 jobs in February, surpassing the pre-pandemic average of 25,100. Employment gains were reported across various sectors including Government (9,700), Leisure & Hospitality (8,400), Professional & Business Services (6,900), Construction (2,900), Private Educational Services (2,200), Other Services (1,600), Health Care and Social Assistance (800), Manufacturing (700), Financial Activities (600), Information (500), and Natural Resources & Mining (100). Employment losses were noted in Trade, Transportation, & Utilities (-3,200). Health Care and Social Assistance recorded the largest year-over-year gains (10,300), while Government experienced the most significant losses (-8,400).
In January, year-over-year metropolitan unemployment rates were higher in 252 of the 387 metropolitan areas, lower in 101, and unchanged in the remaining 34. The January unemployment rates for the Tucson and Phoenix metropolitan areas stood at 5.1% and 4.4%, respectively. Yuma registered the highest unemployment rate in Arizona at 11.4%, with Phoenix having the lowest. Urban Honolulu, HI, boasted the lowest unemployment rate nationwide at 2.1%, while El Centro, CA, reported the highest rate at 18.6%. The largest year-over-year increase occurred in Wildwood-The Villages, FL (+2.4 percentage points), and Asheville, NC, saw the largest year-over-year decline (-2.4 percentage points).
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