Inflation is getting worse. Just how bad is it going to get?

By Jeffry Bartash

Consumer and wholesale prices are rising at the fastest rate in three years due to the Iran war

Higher prices have forced Americans to be more choosy about what they buy.

The surge in gasoline prices tied to the Iran war is set to drive U.S. inflation to a three-year high - and it might get worse before it gets better.

A pair of major price barometers this week are expected to confirm what's obvious to Americans every time they fill up their cars. Inflation is rising again and chewing up a bigger portion of their take-home pay.

That's not the only downside of higher inflation. The increase in prices has handcuffed the Federal Reserve.

The central bank is likely to be stymied from cutting interest rates aggressively, leaving the cost of borrowing painfully high for prospective home buyers and anyone who needs a big loan.

The consumer-price index, due out on Tuesday, is forecast to rise a sharp 0.6% in April after a bulging 0.9% increase in March.

The yearly rate of inflation, in turn, is primed to rise to 3.8% from 3.3% in the prior month. That would mark the highest level since the spring of 2023.

Just how bad is it going to get?

The rate of inflation could top 4% in May because gas prices have stayed high, predicted Omair Sharif of Inflation Insights, a top Wall Street DJIA SPX forecasting firm.

Whether May ends up being the peak of the current inflation spike remains to be seen. It will depend on whether the U.S. and Iran end hostilities, whether the Strait of Hormuz is fully reopened and whether oil prices come down again.

If there's any good news, it's that higher energy prices haven't spread deeply into the body of the U.S. economy, at least so far.

"Higher energy prices have rapidly passed through to create grim inflation headlines, but for now, contagion into other prices remains largely absent," said Michael Metcalfe, head of macroeconomic strategy at State Street Markets.

The evidence can be seen in the so-called core CPI that omits food and energy. It's forecast to rise a more modest 0.3% in April.

The 12-month core rate of inflation, what's more, is seen as edging up to just 2.7% in April from 2.6%. That's not far from the Fed's 2% inflation goal.

The Fed prefers to focus on core inflation to guide its decisions because it's more truly reflective of underlying inflation trends in the economy. Gas prices can rise or fall very quickly and exaggerate the rate of inflation.

Still, higher gas prices can only be ignored for so long. If they stay high enough for long enough, they will push overall inflation higher.

There's plenty of evidence of that in wholesale prices. They are rising faster than consumer prices and suggest lots more inflation is in the pipeline.

The producer-price index, due Wednesday, is likely to show a big increase in wholesale inflation. The headline PPI is forecast to climb 0.6%.

If the forecast is spot-on, the annual increase in wholesale inflation would jump to 4.8% from 4% in the prior month, reflecting the highest rate since February 2023.

Yet while wholesale prices influence what consumers pay, the relationship is far from exact. Companies raise or lower prices for a number of reasons, and many are finding it hard to keep increasing them.

After years of high inflation, Americans are less willing to accept price increases, a refusal they express by buying less or seeking cheaper alternatives.

Now that they have to pay more for gas, they also have less to spend on other goods and services.

Still, the only way inflation is going to slow down again is for the Iran conflict to end and oil prices to subside.

Even a quick end to the war, however, won't immediately translate into slower inflation. It take months for a burst of higher inflation to work its way through and out of the economy.

-Jeffry Bartash

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05-11-26 1300ET