Source Credit : Portfolio Prints
U.S. inflation accelerated at its fastest pace in three years in April, fueled by surging energy prices linked to the escalating Iran conflict. The spike in inflation has reinforced expectations that the Federal Reserve will keep interest rates elevated well into next year.
Rising price pressures are increasingly squeezing American households, weakening purchasing power and threatening to slow consumer spending and broader economic growth. New data from the Commerce Department released Thursday showed inflation-adjusted disposable income declined for a third consecutive month in April, while the personal saving rate fell to its lowest level in four years.
The worsening cost-of-living crisis is also weighing heavily on President Donald Trump’s economic approval ratings. A Reuters/Ipsos poll conducted last week showed Trump’s approval rating slipping close to its lowest point since returning to the White House in early 2025, including a noticeable decline in support among Republican voters. Trump’s 2024 election victory was driven largely by promises to bring inflation under control.
With gasoline prices and household expenses continuing to rise, economists warn that inflation could become a political liability for Republicans ahead of the November midterm elections. Despite mounting concerns, Trump said Wednesday he was unconcerned about the political consequences of a prolonged conflict with Iran.
“The inflation picture 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 next few months, and while the Fed cannot fix a supply shock, it cannot ignore one that is feeding into underlying inflation.”
The Personal Consumption Expenditures (PCE) Price Index — the Federal Reserve’s preferred inflation gauge — rose 3.8% year-over-year in April, marking its largest annual increase since May 2023, according to the Commerce Department’s Bureau of Economic Analysis. That followed a 3.5% rise in March and matched economists’ expectations.
On a monthly basis, the PCE index climbed 0.4% in April after surging 0.7% in March, underscoring the persistence of inflationary pressures across the economy.
The conflict in the Middle East has disrupted shipping routes through the Strait of Hormuz, driving up global energy prices and straining supply chains worldwide. The disruptions have contributed to shortages and higher costs for a wide range of goods, including fertilizer, aluminum, and consumer products.
According to the U.S. Energy Information Administration, the national average retail gasoline price jumped 12.3% in April alone. Since the conflict began in late February, gasoline prices have surged more than 50%.
Consumers are also paying more for food, goods, and everyday services. Inflationary pressures were already elevated before the Iran conflict due to President Trump’s broad import tariffs, and economists say the impact of those tariffs continues to ripple through the economy.
Goods prices rose 0.7% in April, led by a 5.5% increase in gasoline and energy-related products. Food prices rebounded 0.5% after previous declines.
Core PCE inflation, which excludes volatile food and energy prices, increased 3.3% year-over-year in April — the largest annual gain since November 2023 — up from 3.2% in March. On a monthly basis, core inflation rose 0.2% following a 0.3% increase in March.
The Federal Reserve targets inflation at 2%, but financial markets increasingly expect policymakers to keep benchmark interest rates in the 3.50%–3.75% range through at least 2027. Minutes from the Fed’s April policy meeting showed a growing number of officials are even open to additional rate hikes if inflation continues to accelerate.
Despite inflation concerns, Wall Street stocks moved higher Thursday following reports that the United States and Iran had reached a preliminary agreement to extend their ceasefire, pending Trump’s approval. Meanwhile, the dollar weakened against major currencies and U.S. Treasury yields declined.
Prices for recreational goods and vehicles increased 1.6% in April, while clothing and footwear prices rose 0.4%. However, furnishings and durable household equipment prices declined for a second straight month.
Services inflation also remained firm, with prices rising 0.3% for a third consecutive month. Housing and utility costs climbed 0.6%, transportation services rose 0.4%, and food service and accommodation prices advanced 0.5%.
Higher prices are inflating the dollar value of consumer spending, even as real purchasing power weakens. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% in April after increasing 1.0% in March, driven largely by spending on gasoline and energy products.
So far, higher fuel costs have not significantly reduced spending in other areas. Consumers continued to spend more on recreation, restaurants, and bars during April, supported in part by substantial tax refunds that have temporarily cushioned lower-income households.
Americans are increasingly relying on savings to maintain spending levels. The personal saving rate dropped to 2.6% in April — its lowest level since June 2022 — down from 3.2% in March.
Income growth remained weak, with wages rising just 0.2% in April. Although layoffs remain historically low and continue to support the labor market, inflation-adjusted disposable income fell another 0.5%, extending a decline that began in February.
Real disposable income declined 1.1% compared with a year earlier, marking the sharpest annual drop since November 2022.
“Consistent declines in real disposable personal income are a major headwind for consumer spending growth going forward and a potential red flag for the economic expansion should strong household wealth gains unexpectedly evaporate,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.
Economists expect consumers will increasingly prioritize rebuilding savings as uncertainty surrounding the Iran conflict and inflation continues to intensify. After adjusting for inflation, real consumer spending edged up just 0.1% in April following a 0.3% increase in March.
The government also revised down first-quarter economic growth figures on Thursday. Consumer spending growth was cut to a 1.4% annualized pace from the previously reported 1.6%, while overall GDP growth was revised sharply lower to 1.6% from 2.0%.
Much of the economy’s remaining momentum is being supported by artificial intelligence-related investment and spending by wealthier households that have benefited from rising stock markets.
Separate data from the Census Bureau showed that non-defense capital goods orders excluding aircraft — a key measure of business investment — fell 1.1% in April, though the decline followed unusually strong gains in February and March.
“The expansion continues to rest on affluent consumers, AI-driven investment and asset price appreciation,” said Gregory Daco, chief economist at EY-Parthenon. “These pillars are masking an increasingly uneven economic foundation.”
