US inflation tightens as Iran war raises rates

by Lucia Mutikani

WASHINGTON, May 28 (Reuters) – U.S. inflation rose to the fastest pace in three years in April, driven by higher energy prices amid the war with Iran, and a strengthening of economic sentiment that the Federal Reserve could keep interest rates unchanged until next year.

Rising inflationary pressures are eroding household incomes and could dampen consumer spending and economic growth this quarter. Household income after adjusting for inflation fell for the third straight month in April, other data showed on Thursday.

Given the rising cost of living, Americans are growing frustrated with President Trump’s handling of the economy. A Reuters/Ipsos poll last week showed President Trump’s approval rating has fallen to near-low levels since he returned to the White House, hit by declining Republican support. Trump won the 2024 presidential election in large part because of his promise to lower inflation.

Inflation threatens his Congress Party’s majority in November’s midterm elections.

“The inflation picture is becoming less favorable for the Fed,” said Olu Sonola, head of US economics at Fitch Ratings. “Price pressures are likely to continue for the next few months, and while the Fed can’t fix a supply shock, it can’t ignore one that includes underlying inflation.”

The consumer price index rose 3.8% in the 12 months through April, the largest increase since May 2023, the Commerce Department’s Bureau of Economic Analysis said. PCE inflation continued at an unrevised 3.5% in March.

Economists polled by Reuters had predicted that PCE inflation would increase by 3.8% year-on-year. The PCE price index rose 0.4% month-on-month in April after shooting 0.7% in March.

The Middle East conflict has disrupted shipping in the Strait of Hormuz, driving up energy prices, straining global supply chains and creating shortages of many goods, including fertilizer, aluminum and consumer products. The national average gasoline price rose 12.3% in April, data from the US Energy Information Administration showed.

Fuel prices have increased by more than 50% since the war began at the end of February. Apart from the pain at the tap, consumers are also paying higher prices for other goods and services. Inflation had already risen before the war, largely because of Trump’s sweeping import duties.

Commodity prices rose 0.7% last month, while fuel and other energy products rose 5.5%. Food prices rose 0.5%.

Excluding the volatile food and energy components, the PCE price index rose 3.3% year-on-year in April after rising 3.2% in March. So-called core PCE inflation gained 0.2% in April on a monthly basis after advancing 0.3% in March.

The US central bank is tracking PCE inflation measures at its 2% target. Financial markets expect the Fed to keep its overnight interest rate in the 3.50%-3.75% range through 2027. Minutes of the Fed’s April 28-29 meeting published last week showed a growing number of policymakers are open to the possibility that they need to raise rates.

Services prices rose 0.3% in April for the third month in a row. The cost of housing and utilities increased by 0.6% while the prices of transportation services increased by 0.4%. Food and accommodation prices rose by 0.5%.

Rising prices recommend the dollar value of consumption. Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.5% last month after rising 1.0% in March. Big tax refunds have given consumers a cushion, especially low-income families.

Consumers are also trying to save, the savings rate fell to 2.6% last month. That was the lowest rate since June 2022 and down from 3.2% in March. Income is unchanged. After adjusting for inflation, household income fell by 0.5%.

As inflation outpaces wage gains and the tax season is over, consumers are likely to hold back. Economists also expect that consumers will at some point want to start saving again, especially in the face of the uncertainty created by the war. Adjusted for inflation, consumer spending rose 0.1% in April after rising 0.3% in March.

The government revised the pace of consumer spending growth in the first quarter to 1.4% from the previously reported annual rate of 1.6%. Overall domestic product growth slowed to 1.6% from 2.0% estimated last month.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)