The U.S. Department of Commerce released data on Thursday showing that the Federal Reserve's preferred monthly inflation gauge reached a three-year high, primarily due to the U.S.-Iran conflict driving up energy prices. This data further solidifies expectations that the Fed will struggle to pivot toward an easing cycle until the current inflationary pressures subside. However, the mounting spending pressures on consumers could introduce a potential turning point for the economy and prices, potentially creating conditions for a rate cut.
The impact of energy continues to be felt. The Commerce Department reported that the Personal Consumption Expenditures (PCE) price index rose 0.4% month-over-month in April, slightly better than the 0.7% increase in March. Excluding the volatile food and energy categories, the core PCE price index increased 0.2% from the previous month. On a year-over-year basis, the PCE price index has risen by 3.8% over the past twelve months, marking a three-year high. Core PCE increased by 3.3% annually, moving further away from the Fed's 2% inflation target.
Energy was again a major driver of inflation. The PCE index for gasoline and other energy-related goods surged 5.5% month-over-month in April, following a 20.9% spike in March. The U.S.-Iran conflict has disrupted shipping through the Strait of Hormuz, pushing up energy prices while squeezing global supply chains, leading to shortages in fertilizers, aluminum, and various consumer goods. Data from the U.S. Energy Information Administration (EIA) shows that U.S. retail gasoline prices soared 12.3% month-over-month in April; since the conflict began in late February, oil prices have risen by over 50%.
Within services, prices for housing and utilities saw their monthly increase widen from 0.3% in March to 0.6% in April, the largest single-month gain in over a year. Prices for food services and accommodations rose 0.5%. Prices for purchased meals and beverages, which were flat in March, also increased by 0.5% in April.
Notably, categories related to core sticky inflation, which the Fed monitors closely, showed signs of cooling. The supercore inflation measure—services excluding energy and housing—rose only 0.1% month-over-month in April, a significant slowdown from the 0.3% increase in March. Within this, prices for financial services and insurance fell 0.4%, while the increase in transportation services prices narrowed from 1.2% to 0.4%.
The report also showed that U.S. personal consumption expenditures rose 0.5% month-over-month in April, in line with expectations.
Affected by inflation, Americans' passive spending on gasoline, various goods, and services continues to grow, yet consumer behavior has not halted. With oil prices currently high, household purchasing power has been significantly eroded. Real disposable personal income, adjusted for inflation, also showed weakness, remaining essentially flat in April. After adjusting for inflation, real personal consumption expenditures edged up just 0.1%, showing almost no growth. The growth in consumption has largely been fueled by households drawing down their savings, with the personal saving rate falling to 2.6%, the lowest level since June 2022.
Consumption is the core driver of the U.S. economy. Large tax refunds have temporarily offset some of the economic pressure from high oil prices, but these funds will eventually be depleted. With inflation persistently high and its growth rate exceeding wage growth for the first time in three years, American public dissatisfaction with President Trump's economic management is growing. A recent Ipsos poll showed Trump's presidential approval rating has fallen to its lowest level since his return to the White House.
A rate cut appears distant. The latest survey from The Conference Board this week revealed that two-thirds of consumers reported cutting overall spending due to rising prices. The majority are buying less and postponing purchases of high-priced items; many are delaying non-essential purchases and plan to make them within the next six months. Consumers also plan to cut back on spending for clothing and footwear, hobby items, games, and toys.
In commentary, Bernard Yaros, Chief U.S. Economist at Oxford Economics, wrote that for most of 2026, inflation growth is expected to continue outpacing wage gains. The additional costs from rising diesel and fertilizer prices will continue to be passed through, and these essential costs will ultimately be factored into the pricing of everyday consumer goods. Once higher energy costs diffuse across all categories of goods, cutting back on spending becomes increasingly difficult. "With prices rising broadly, consumers have almost nowhere to avoid cost pressures. This is the biggest concern for the future, impacting low-income families particularly severely," he stated.
Many on Wall Street believe consumer prices will continue to rise for at least another one to two months, with the inflation rate potentially breaching 4% in the near term. The path of inflation will depend on when the U.S.-Iran conflict ends, whether the Strait of Hormuz reopens for normal shipping, and the pace of any decline in oil prices. "There is currently no clear endpoint to the conflict. The main drivers of inflation—energy, oil, gasoline, transportation, and food—will rise further in the coming months as global supplies tighten and supply chain pressures increase," said Joseph Brusuelas, Chief Economist at RSM.
The April inflation data has further strengthened the stance of hawkish Federal Reserve officials. They increasingly view the energy shock from the Strait of Hormuz not as a short-term disturbance that can be temporarily set aside, but as a significant risk that could damage the central bank's credibility. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, stated on Wednesday that bringing down inflation remains the top priority, explicitly stating that current price levels are "still too high." He advocates for a dual mandate considering both employment and inflation but clarified the policy focus: "We need to consider both, but right now the labor market is performing robustly, while inflation is clearly elevated."
Federal Reserve Governor Lisa Cook took a more hawkish tone. She indicated that the inflation trajectory has clearly deviated from a reasonable range, and if inflation does not decline as expected, the Fed will initiate interest rate hikes.
Current market pricing suggests traders believe the Fed will keep interest rates unchanged at least until the end of 2026, with the next policy move most likely being a rate hike, potentially occurring early next year. The minutes from the April meeting released last week also showed a growing number of policymakers believe a future increase in the policy rate may be necessary.
Peter Cardillo, Chief Market Economist at Spartan Capital Securities, believes the price data clearly reflects that the U.S. is mired in a stagflation dilemma. This presents a significant challenge for the Fed: weak economic growth alongside persistently high inflation. The likelihood of the Fed raising interest rates is rising compared to the prospect of a rate cut.
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