The annual inflation rate jumped to 3.8% in April as soaring fuel prices began to work their way through the U.S. economy, according to Bureau of Labor Statistics data released Tuesday. The annual reading is a bit higher than expected, and well above the 3.3% rate recorded in March.
On a monthly basis, the Consumer Price Index rose 0.6% in April. Energy prices, driven sharply higher by the war against Iran, accounted for more than 40% of the month-to-month increase.
The core inflation rate, which ignores volatile food and fuel prices, rose more modestly, edging higher by two-tenths of a percentage point to 2.8% on an annual basis. On a monthly basis, core prices rose 0.6%.
Although economists prefer to look at the core inflation rate to get a better sense of the underlying trend, consumers are typically more focused on the topline number, which reflects the prices they’re paying at the grocery store and the gas pump — and those numbers have been painful.
Overall energy prices were up 18% year-over-year, while gasoline prices rose 28% over the last 12 months, and 5.4% in April alone. (The actual monthly increase in gas prices was even higher at 11.1%, but the seasonal adjustment used by government statisticians reduced the number as it factored in typical price increases ahead of the summer driving season.)
Rising fuel prices usually spill over into other areas. Airfares jumped 20.7% over the last year, thanks in part to a big jump in the cost of jet fuel. Electricity prices rose, as well, climbing 2.1% in a month. And higher prices for diesel fuel translate into higher food prices; tomatoes were 40% more expensive in April than a year earlier, in part due to soaring transportation costs, with tariffs and bad weather also playing a role. Overall, food prices rose 2.9% year-over-year in April, and 0.7% month-over-month.
Another thing consumers are likely to notice: The surge in prices in April means that wages are no longer keeping up with inflation. Wages were up 3.6% on an annual basis last month, but 3.8% inflation has now claimed that wage growth and then some.
What the analysts are saying: The sharp reduction in energy flowing out of the Strait of Hormuz continues to drive much of the inflation story. “It’s like the aorta artery in your body,” Boston College economist Brian Bethune told CNBC. “When that is choked down, it is the whole global economy that is affected.”
The question most analysts are asking is how long the inflationary surge will last. Joseph Brusuelas, chief economist at RSM, expects the inflation rate to continue to rise, moving to 4% in the coming months. “Median American families are going to find it very challenging to adjust going into the second half of the year,” he told The Wall Street Journal.
Mark Zandi, chief economist at Moody’s Analytics, said he’s worried about the inflationary trend. “Inflation obviously is high, and the direction of travel feels disconcerting,” he told CNBC. “It does feel like the inflationary effects are broadening out and will impact the prices more broadly.”
One key dynamic will be the ongoing price effects in the wider economy. “The first order effect from the conflict in the Middle East [has] been a shock to oil prices, which [has] translated very quickly to what consumers are paying at the pump, but the next frontier to watch is rising input prices for food and materials,” said Skyler Weinand, chief investment officer at Regan Capital, per CNBC.
How this affects the Fed: The likelihood that elevated inflation will continue to dog the U.S. economy suggests that the Federal Reserve may have to postpone rate cuts and contemplate raising rates to help cool the inflationary surge.
“The fact that higher input costs from oil are being readily passed through to consumers, as well as other signs of broadening inflation impact, should both add to the Fed’s worries about inflation,” said Preston Caldwell, chief U.S. economist at Morningstar, per Yahoo Finance. “The odds of a rate hike in 2026, while still less than 50%, are rising.”
The bottom line: Inflation is picking up again due to the war in the Middle East, and it looks like there is more inflationary pressure in the pipeline.
