War-driven energy shock pushes US inflation to three-year high

• Annual inflation hit 3.8% in April.
• This marks the highest consumer price acceleration since May 2023.
• Surging oil prices linked to the conflict in Iran accounted for 40% of the total Consumer Price Index (CPI) increase.
• Financial markets and major banks now predict that the Federal Reserve may not lower interest rates until late 2027.

The US economy faced a sharp inflationary surge in April as the Consumer Price Index (CPI) climbed to an annual rate of 3.8%.

According to Labor Department data released Wednesday, the jump exceeded the 3.7% forecast by economists and represents a significant spike from the 3.3% recorded in March.

The primary catalyst for the surge is the ongoing war with Iran, which has severely constrained global oil supplies since hostilities erupted in March.

Energy prices accounted for nearly half of the monthly increase, with gasoline prices skyrocketing 28.4% compared to a year earlier.

This energy shock has pushed gasoline to its highest price levels since July 2022.

"Squeeze" on wages

While fuel is the most visible driver, "Core CPI" -which strips out volatile food and energy costs- rose 2.8% year-over-year.

This indicates that high transportation and manufacturing costs are beginning to "pass through" to other sectors:

Airfares: Airline tickets saw a staggering 20.7% annual jump as carriers pass higher jet fuel costs to travelers.

Groceries and goods: Experts warn that diesel-reliant industries like agriculture and construction will soon see price hikes as delivery costs mount.

"Inflation is the key drag on the US economy now," said Heather Long, chief economist at Navy Federal Credit Union.

She noted that for the first time in three years, inflation is completely offsetting wage gains, adding approximately $75 in monthly expenses to the average household.

Trump proposes federal gas tax

In a recent interview with CBS News, US President Donald Trump announced plans to suspend the federal gasoline tax -18.4 cents per gallon for regular and 24.4 cents for diesel- "for a period of time" to provide immediate relief.

However, Trump rejected the idea of a government bailout for US air carriers, many of which have hiked prices ahead of the summer travel season.

Critics and economists remain skeptical of the tax holiday's impact, suggesting it may offer only marginal relief while global supply remains choked by the maritime blockade in the Persian Gulf.

Fed's "Higher for longer" reality

The hot inflation report has effectively dashed hopes for an interest rate cut in the near future. With the labor market cooling and prices heating up, Northlight Asset Management analysts described a rate cut as "very unlikely."

Current market sentiment, tracked by the CME Group's FedWatch tool, shows less than a 50% chance of a rate reduction before March 2027.

Some major institutions, including Bank of America, have pushed their forecasts even further, suggesting the Federal Reserve may remain on hold until the second half of 2027.