* Consumer Price Index increases 0.9% in March, largest

gain since mid-2022

* Gasoline prices account for nearly three quarters of

rise in inflation

* CPI advances 3.3% year-on-year, largest increase since

May 2024

* Core CPI gains 0.2%; increases 2.6% year-on-year

By Lucia Mutikani

WASHINGTON, April 10 (Reuters) - U.S. consumer prices

increased by the most in nearly four years in March as the war

with Iran led to a record surge in the cost of gasoline and

diesel, dealing a blow to President Donald Trump whose approval

ratings have been falling because of unhappiness over his

handling of the economy.

Though the Consumer Price Index report from the Labor

Department on Friday showed an underlying measure of inflation

that excludes the volatile food and energy components rising

moderately last month, economists said that was because March's

data only captured the immediate effects of the oil price shock.

As such, the benign so-called core CPI readings would offer no

comfort to officials at the Federal Reserve and did not change

economists' expectations that the U.S. central bank would most

likely not cut interest rates this year. The report followed in

the wake of a sharp rebound in job growth last month, which

suggested the labor market remained stable.

"The economy has just taken a direct inflation hit as a

result of the war in the Middle East," said Christopher Rupkey,

chief economist at FWDBONDS. "Every recession since the 70s has

been preceded by an energy price shock and if consumers thought

there was a cost of living crisis before, get ready, as you

haven't seen nothing yet."

The Consumer Price Index jumped 0.9% last month, the Labor

Department's Bureau of Labor Statistics said, the largest

increase since June 2022 when prices soared in response to the

Russia-Ukraine war. Consumer prices rose 0.3% in February.

A record 21.2% jump in gasoline prices accounted for nearly

three quarters of the monthly increase in the CPI. Other motor

fuels, which include diesel, soared 30.8%, the largest rise

since the government started tracking the series.

The U.S.-Israeli war with Iran has sent global crude oil prices

surging more than 30%, with the national average retail gasoline

price breaking above $4 a gallon for the first time in more than

three years. Though Trump on Tuesday announced a two-week

ceasefire on the condition that Tehran reopen the Strait of

Hormuz, the truce appeared fragile.

In the 12 months through March, the CPI advanced 3.3% after

rising 2.4% in February.

Economists polled by Reuters had forecast the CPI

accelerating 0.9% and increasing 3.3% year-on-year. There are,

however, concerns that a prolonged conflict in the Middle East

could undercut the labor market, especially if households

respond to high prices by pulling back spending.

March's surge underscored the affordability challenges

facing consumers. Trump romped to victory in the 2024

presidential election promising to lower prices. Food prices

were unchanged after rising 0.4% in February.

Stocks on Wall Street were higher. The dollar fell against a

basket of currencies. U.S. Treasury yields rose.

SECONDARY EFFECTS OF OIL PRICE SHOCK EXPECTED

Excluding the volatile food and energy components, the CPI

rose 0.2% last month after climbing 0.2% in February. Increases

in rents, airline fares as well as apparel and household

furnishings and operations because of tariffs were blunted by a

decline in the prices of used cars and trucks.

That translated to a year-on-year increase of 2.6% in the

core CPI. The moderate rise after a 2.5% advance in February

likely offers no comfort for officials at the U.S. central bank,

with an acceleration expected in April as the secondary effects

of the oil price shock filter through.

The Fed tracks the Personal Consumption Expenditures price

indexes for its 2% inflation target. Those measures posted

strong monthly gains in February. Both core CPI and PCE

inflation have been driven by businesses passing on some of

Trump's broad tariffs to consumers, offsetting the

disinflationary trend in rents.

In the months ahead, economists expect the Middle East

conflict to lift core prices through expensive jet fuel that

will raise airline fares, and diesel, which will increase the

cost of goods transported by road. Prices of fertilizer and

plastics, among other goods, are also expected to rise.

Firming inflation has left some economists believing the Fed

would not reduce borrowing costs this year, a conviction that

was reinforced by the release on Wednesday of minutes of the

central bank's March 17-18 policy meeting, which showed a

growing group of policymakers last month felt that rate hikes

might be needed.

The Fed left its benchmark overnight interest rate in the

3.50%-3.75% range. Some economists still see a chance of a rate

cut if labor market conditions deteriorate. Others argued that

consumers pulling back as gasoline prices eroded their

purchasing power could make it difficult for some businesses to

pass on higher costs from oil prices.

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