The personal savings rate in the United States has fallen to its lowest level since 2022. Data released by the U.S. Department of Commerce on Thursday showed 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 reinforces expectations that the Fed will find it difficult to pivot toward easing until the current inflationary pressures subside. However, the spending pressures facing consumers could create a potential turning point for the economy and prices, potentially triggering conditions for interest rate cuts.
**Energy Impact Continues** The U.S. Department of Commerce 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 by 0.2% month-over-month. On an annual basis, the PCE price index rose 3.8% over the past year, marking a three-year high, while core PCE rose 3.3% year-over-year, moving further away from the Federal Reserve's 2% inflation target.
Energy once again became 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 for this indicator. The U.S.-Iran conflict has disrupted shipping in the Strait of Hormuz, pushing up energy prices while squeezing the global supply chain, leading to shortages of 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 the services category, the month-over-month increase in housing and utility prices expanded from 0.3% in March to 0.6% in April, the largest single-month increase in over a year. Prices for food services and accommodations rose 0.5%; prices for purchased meals and beverages also increased by 0.5% in April after remaining flat in March.
Notably, categories related to core sticky inflation, which the Federal Reserve closely monitors, showed signs of cooling. Services excluding energy and housing (often referred to as supercore inflation) rose only 0.1% month-over-month in April, a significant slowdown from the 0.3% increase in March. Within this category, prices for financial and insurance services fell 0.4%, while the increase in transportation services prices narrowed from 1.2% to 0.4%.
The report also showed that U.S. consumer spending rose 0.5% month-over-month in April, meeting expectations.
Impacted by inflation, Americans' involuntary spending on gasoline, various goods, and services continues to increase, but consumer activity has not ceased. With current high oil prices, people's purchasing power is significantly diminished. Real income, adjusted for inflation, also remained weak in April, essentially flat. After adjusting for inflation, real consumer spending edged up 0.1%, showing almost no growth. Much of the consumption growth stemmed from consumers dipping into savings, with the personal savings 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 this source of funds will eventually be depleted. Persistently high inflation, with its rate exceeding wage growth for the first time in three years, is fueling growing dissatisfaction among Americans with the economic management of President Donald Trump. A recent Ipsos poll showed Trump's presidential approval rating falling to its lowest level since his return to the White House.
**Rate Cuts Seem Distant** The latest survey from The Conference Board this week indicated that two-thirds of consumers reported reducing overall spending due to rising prices. Most 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.
Bernard Yaros, Chief U.S. Economist at Oxford Economics, noted in commentary that for most of 2026, inflation is expected to continue outpacing wage growth. Additional costs from higher diesel and fertilizer prices will continue to be passed through, and these two essential costs will ultimately be factored into the pricing of everyday consumer goods. Once rising energy costs spread across all categories of goods, cutting back becomes increasingly difficult. "With prices rising across the board, consumers have almost nowhere to avoid cost pressures, which is the biggest future concern, hitting low-income families particularly hard," he stated.
Many on Wall Street believe consumer prices will continue to rise for at least another month or two, with the inflation rate potentially breaching 4% in the short term. The path of inflation will depend on when the U.S.-Iran conflict ends, whether the Strait of Hormuz can resume normal traffic, and the pace of oil price declines. "There is currently no clear end to the conflict. The main drivers of inflation—energy, oil, gasoline, transportation, and food—will rise further in the coming months as global supply tightens and supply chain pressures increase," said Joseph Brusuelas, Chief Economist at RSM.
The April inflation data has further solidified 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. Minneapolis Fed President Neel Kashkari stated on Wednesday that bringing down inflation remains the top priority, bluntly stating that current price levels are "still too high." He advocated for a dual mandate approach 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 an even more hawkish tone. She stated 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 indicates that 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 April meeting minutes released last week also showed a growing number of policymakers believe a future policy rate increase may be necessary.
Peter Cardillo, Chief Market Economist at Spartan Capital Securities, believes the price data clearly reflects the U.S. is mired in a stagflation dilemma. This presents a significant challenge for the Fed: weak economic growth coupled with persistently high inflation. The likelihood of the Fed raising rates is increasing compared to the possibility of rate cuts.
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