Inflation jumps to 3-year high, CPI shows, and that's not the end of it

By Jeffry Bartash

Rising gas prices after Iran war fuel more inflation

Higher fuel prices have pushed U.S. inflation to a three-year high.

The U.S. inflation rate leaped to a nearly three-year high of 3.8% in April because of higher gas prices - and the pain for consumers isn't going away anytime soon.

The spurt in inflation since the Iran war began six weeks ago could force the Federal Reserve to shelve an interest-rate cut this summer, especially since the jobs market has improved. The Fed cut a key interest rate three times last year to keep the unemployment rate from rising.

The consumer-price index - what Americans pay for goods and services - rose a sharp 0.6% in April after a nearly 1% surge in March, the government said Tuesday. The back-to-back increases in inflation are the worst in four years.

The yearly rate of inflation climbed to 3.8% from 3.3% in the prior month.

A steep increase in oil and gas prices is mostly responsible for the rise in inflation. So far higher fuel costs haven't spread much into other areas of the economy, aside from airline tickets.

The so-called core rate of inflation rose 0.4% in April, a touch faster than Wall Street analysts predicted. The core rate omits food and energy and is a better predictor of future inflation.

The 12-month increase in the core rate moved up to a seven-month high of 2.8% from 2.6%, pushing it further away from the Fed's goal of 2% annual inflation.

Consumer prices are likely to keep rising for at least another month or two, economists say, and the inflation rate could top 4% briefly.

Beyond the next few months, the trajectory of inflation will depend on how quickly the Iran war ends, the Strait of Hormuz is reopened and oil prices decline.

Key details: Gasoline prices rose a seasonally adjusted 5.4% in April after a 21% increase in March.

The evidence is plain to see at the pump. The average cost of a gallon of regular gas nationwide leaped to $4.12 at the end of April from $2.94 before the Iran war began, according to government figures.

The cost of groceries also posted the biggest increase last month in almost four years.

Other goods and services whose prices rose sharply included clothing, airline fares and rent. The cost of a plane ticket has skyrocketed 21% in the past year, with most of increase coming since January.

The rise in rents was the biggest in 27 months, but it appeared to stem from an update in the method the government uses to track price increases.

A record-long government shutdown last fall prevented the Bureau of Labor Statistics from collecting accurate information on rents, leading to a situation in which prices increases were temporarily understated.

The April CPI was supposed to rectify the problem.

There's little evidence in other real-estate data, however, to suggest that rents are actually rising faster again. Rent increases have slowed steadily since hitting an all-time peak three years ago.

Big picture: Higher inflation has pinched households and raised costs for businesses. Yet the economy is still growing at an above-average rate and the the stock market has roared back after a war-induced slump.

The economy could do even better if the war ends. That would reduce inflation, offer badly needed relief to consumers and pave the way for the Fed to reconsider another reduction in interest rates.

It's unclear when that will happen, however, in light of an uneasy stalemate between the U.S. and Iran since the end of April.

Looking ahead: "While this inflation is driven by oil prices and is not structural, it doesn't change the fact that consumers are paying higher prices, and as a result, we expect the Federal Reserve to be on hold through the summer on interest rates," said Skyler Weinand, chief investment officer at Regan Capital in Dallas.

Market reaction: The Dow Jones Industrial Average DJIA and S&P 500 SPX were set to open lower after the CPI report.

-Jeffry Bartash

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05-12-26 0917ET