In April, U.S. inflation surged at its quickest rate in three years, largely due to rising energy costs linked to the ongoing conflict with Iran. This situation appears to strengthen the belief among economists that the Federal Reserve might hold interest rates steady until the following year.
The Personal Consumption Expenditure Price Index (PCE) showed a 3.8% increase over the 12 months ending in April, marking the steepest rise since May 2023, as reported by the Commerce Department’s Bureau of Economic Analysis. For context, PCE inflation was up 3.5% in March without any revisions.
Economists surveyed by Reuters had anticipated a 3.8% rise in PCE inflation compared to the previous year. In April, the PCE price index rose 0.4% month-over-month, following a larger 0.7% increase in March.
This ongoing conflict has not just interfered with shipping in the Strait of Hormuz but also strained global supply chains, causing shortages in various items like fertilizers, aluminum, and everyday consumer goods.
The average national retail price of gasoline saw a notable increase of 12.3% in April, according to the U.S. Energy Information Administration. Overall, gasoline prices have jumped over 50% since the onset of the war in late February.
In addition to gasoline, consumers are facing increased costs for other goods and services. Inflation had already started climbing before the war, primarily due to significant import tariffs implemented during President Trump’s administration.
As inflation continues to trend upwards, American dissatisfaction with President Trump’s management of the economy has heightened. A recent Reuters/Ipsos poll reveals that his approval rating is near a historic low since his return to office, with support waning even among Republicans.
Trump’s victory in the 2024 presidential election hinged significantly on his promise to tackle inflation. The rise in prices now poses a risk to his party’s majority in Congress, especially with the midterm elections approaching in November.
Excluding volatile food and energy prices, the core PCE index rose 3.3% year-on-year in April, up slightly from 3.2% in March.
Core PCE inflation increased by 0.2% month over month, following a 0.3% rise in March.
The Federal Reserve has been monitoring the PCE inflation closely, aiming for a target of around 2%. Financial market expectations suggest the Fed will maintain its policy rate between 3.50% and 3.75% until 2027.
Recent minutes from the Fed’s meeting on April 28-29 hinted that policymakers are increasingly recognizing the need for potential interest rate hikes.
Due to escalating prices, personal consumption—which makes up more than two-thirds of economic activity—rose by 0.5% last month, down from a 1.0% increase in March.
While large tax refunds are offering some relief to consumers, particularly those on lower incomes, many are now tapping into their savings. However, with inflation outpacing wage growth and the tax filing season concluding, consumers may start to pull back on spending.
Looking ahead, economists believe there’s a chance consumers will prioritize rebuilding their savings, especially given the uncertainty created by the ongoing conflict.
