Markets are closely watching the March retail sales report, which is expected to answer two key questions: whether prolonged Middle East tensions and rising oil prices have significantly eroded U.S. consumer spending power, and whether the Federal Reserve will be forced to maintain high interest rates to curb inflation or shift toward rate cuts to support the economy.

On March 26, the average U.S. gasoline price rose to $3.98 per gallon, up by about $1 over the month, pushing the cost of a full tank from $39 to $52 and increasing monthly household fuel expenses by $100 to $150. By March 31, the national average exceeded $4 per gallon for the first time since summer 2022, with prices in parts of California surpassing $6, sharply raising commuting costs. The surge has also driven up business expenses, with airlines, logistics, and retailers facing higher fuel and transportation costs, while nearly half of consumers have reportedly begun stockpiling goods, signaling demand may be pulled forward.

Diverging Signals in the Data

Market expectations show a notable split. A Bloomberg survey forecasts headline retail sales to rise 1.4% month-on-month in March, up from 0.6% in February, largely driven by higher fuel prices. Sales excluding autos are also expected to rise 1.4%, with gasoline station sales set to surge again. This suggests strong nominal growth.

However, underlying trends appear weaker. Core retail sales excluding autos and gasoline are expected to rise only 0.2%, slowing from 0.4% in February. The “control group,” which feeds into GDP calculations, is also forecast to increase just 0.2%. This divergence between strong headline growth and weak core demand raises a key question: are higher oil prices supporting consumption or crowding out spending in other areas?

Fed Policy Outlook Divided

Ahead of the data release, major financial institutions are split on the Fed’s policy path. Citi expects rate cuts, arguing that oil supply disruptions linked to geopolitical tensions may prove temporary and not lead to sustained inflation. It emphasizes that investors should focus on underlying data, noting that weaker control group figures would support the case for easing.

In contrast, Deutsche Bank expects the Fed to hold rates steady for an extended period, citing stalled progress on inflation, increasingly hawkish signals from policymakers, and the risk that prolonged geopolitical tensions could keep inflation elevated.

Market pricing reflects this divide. FedWatch data shows no expectation of a rate cut in April and rising odds that rates may remain unchanged through 2026, though some forecasts still anticipate modest easing later this year.

Key Signals to Watch

First, the control group data will be critical, as weaker-than-expected growth would indicate consumers are reallocating spending toward essentials like fuel. Second, inflation trends remain important, with headline CPI rising to 3.3% in March, largely driven by energy, while core inflation remains relatively contained. Third, consumer confidence has fallen sharply, with the University of Michigan index dropping to historic lows, signaling rising recession risks if weak sentiment aligns with soft spending data.