The Federal Reserve’s preferred inflation gauge rose 3.8% from a year earlier as higher energy costs tied to the Iran war added new pressure on consumers and complicated the interest-rate outlook.
By yourNEWS Media Newsroom
U.S. inflation rose in April at the fastest annual pace in three years, as higher gasoline and energy costs linked to the war with Iran pushed prices higher and reinforced expectations that the Federal Reserve may keep interest rates elevated well into next year.
The personal consumption expenditures price index increased 3.8% in the 12 months ending in April, the Commerce Department’s Bureau of Economic Analysis said Thursday. That marked the largest annual increase since May 2023. The March reading was unchanged at 3.5%.
Economists surveyed by Reuters had expected a 3.8% annual increase. On a monthly basis, the PCE price index rose 0.4% in April after climbing 0.7% in March.
The latest increase was driven heavily by energy prices. The conflict with Iran has disrupted shipping through the Strait of Hormuz, raising energy costs while also placing pressure on global supply chains. The disruption has contributed to shortages across a range of goods, including fertilizers, aluminum and consumer products.
Gasoline prices accounted for much of the pressure felt by households. The national average retail price for gasoline rose 12.3% in April, according to data from the U.S. Energy Information Administration. Gas prices have risen more than 50% since the war began at the end of February.
Consumers also faced higher prices beyond fuel. Inflation had already remained above the Federal Reserve’s target before the conflict, partly because of President Donald Trump’s broad import duties.
The rising cost of living has increased public frustration with Trump’s economic record. A Reuters/Ipsos survey last week found that Trump’s presidential approval rating had fallen to near its lowest point since he returned to the White House. Trump campaigned in 2024 on a pledge to lower inflation, and the renewed price surge has added political pressure on Republicans ahead of the November midterm elections.
The Federal Reserve’s preferred underlying inflation measure also moved higher. Excluding the volatile food and energy categories, the core PCE price index rose 3.3% in April from a year earlier, up from 3.2% in March. Core prices increased 0.2% for the month after rising 0.3% in March.
The Fed uses PCE inflation measures to assess progress toward its 2% target. Financial markets now expect the central bank to hold its benchmark overnight interest rate in the 3.50% to 3.75% range into 2027.
Minutes from the Fed’s April 28-29 meeting, released last week, showed that more policymakers were open to the possibility that additional rate increases could be needed if inflation pressures persist.
Consumer spending still rose in April, though economists said part of the increase reflected higher prices rather than stronger demand. Spending, which makes up more than two-thirds of U.S. economic activity, increased 0.5% last month after jumping 1.0% in March.
Large tax refunds have helped some households, particularly lower-income consumers, absorb higher costs. Consumers also have been drawing down savings. Economists cautioned, however, that spending could slow as inflation outpaces wage growth and the tax filing season ends.
Uncertainty tied to the war may also lead households to rebuild savings, which could further limit spending in the months ahead. With inflation rising, fuel costs elevated and borrowing costs expected to remain high, consumers and policymakers face a more difficult economic environment heading into the second half of the year.
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