US inflation rose at fastest pace in three years in April as Iran war drives up prices | American economy

U.S. inflation rose in April at its fastest pace in three years, driven by rising energy prices amid the war with Iran, and reinforcing economists’ views that the Federal Reserve could keep interest rates unchanged until next year.

Growing price pressures are eroding household incomes and could dampen consumer spending and economic growth this quarter. Household income after adjusting for inflation fell for the third consecutive month in April, according to other data released Thursday. Faced with the soaring cost of living, Americans are increasingly frustrated with Donald Trump’s management of the economy. A Reuters/Ipsos survey last week showed the president’s approval rating had fallen to its lowest level since returning to the White House, hit by a drop in support among Republicans. Trump won the 2024 presidential election largely on his promise to reduce inflation.

The government also revised downwards on Thursday the pace of growth of consumer spending in the first quarter, to 1.4% compared to the annualized rate of 1.6% announced previously. Overall gross domestic product (GDP) growth was reduced to 1.6% from 2.0% estimated last month.

Inflation threatens Republican majority in Congress in November midterm elections.

“The inflation situation is becoming increasingly uncomfortable for the Fed,” said Olu Sonola, head of U.S. economics at Fitch Ratings. “Price pressures are likely to persist over the coming months, and while the Fed can’t fix a supply shock, it can’t ignore a shock that fuels underlying inflation.”

The personal consumption expenditures price index jumped 3.8% in the 12 months through April, the biggest increase since May 2023, the Commerce Department’s Bureau of Economic Analysis said. PCE inflation rose by an unrevised 3.5% in March.

Economists polled by Reuters forecast a 3.8% rise in PCE inflation year-on-year. The PCE price index rose 0.4% month-on-month in April after rising 0.7% in March.

The conflict in the Middle East has disrupted shipping in the Strait of Hormuz, raising energy prices, straining global supply chains and causing shortages of a wide range of goods, including fertilizer, aluminum and consumer products. The national average retail gasoline price climbed 12.3% in April, according to data from the U.S. Energy Information Administration.

Gasoline prices have risen more than 50% since the war began in late February. Beyond the pain at the pump, consumers are also paying higher prices for other goods and services. Inflation was already high before the war, largely due to drastic import tariffs imposed by Trump.

Prices of goods rose 0.7% last month, with gasoline and other energy products up 5.5%. Food prices rebounded by 0.5%.

Excluding volatile food and energy components, the PCE price index rose 3.3% year-on-year in April after increasing 3.2% in March. So-called core PCE inflation gained 0.2% in April on a monthly basis after increasing by 0.3% in March. The US central bank tracks PCE inflation measures based on its 2% target. Financial markets expect the Fed to keep its benchmark overnight interest rate in a range of 3.50% to 3.75% through 2027. Minutes from the Fed’s April 28-29 meetings released last week showed that a growing number of policymakers were open to the possibility of having to raise rates.

Interest rate hikes will likely face increased scrutiny from the White House, which has continued to pressure the Fed to lower rates. Kevin Warsh, who was sworn in as Fed chairman last week, previously indicated that he also thinks the Fed should cut rates, but it is unclear whether he will be able to grant Trump his rate cuts. Although Warsh holds the Fed chair, he is one of 12 voting members who set rates.

At his inauguration ceremony last week, Warsh said he aspired to lead a “reform-oriented Federal Reserve.”

“Inflation can be lower, growth higher, real take-home pay higher, and America can be more prosperous, not less important,” he said.

But rising prices continue to threaten this vision. Prices for services increased by 0.3% in April for the third consecutive month. The cost of housing and utilities increased by 0.6%, while prices for transportation services increased by 0.4%. Prices for food and accommodation services increased by 0.5%. The surge in prices flatters the amount of spending. Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.5% last month after jumping 1.0% in March. Large tax refunds have provided a safety cushion for consumers, particularly low-income households.

Consumers are also dipping into savings, with the savings rate falling to 2.6% last month. This is the lowest level since June 2022 and down from 3.2% in March. Revenues remained unchanged. After adjusting for inflation, household income fell by 0.5%.

With inflation outpacing wage gains and tax filing season over, consumers are likely to pull back. Economists also expect that consumers will, at some point, want to start rebuilding their savings, especially in the face of uncertainty caused by the war. Adjusted for inflation, consumer spending edged up 0.1% in April after increasing 0.3% in March.

Reuters contributed to this report

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