US inflation hits 3.8% as Mideast tensions boost oil prices

A hotter-than-expected April inflation report, fueled by a surge in energy costs, complicates the Federal Reserve's path forward on interest rates.

The US inflation rate accelerated to a near three-year high of 3.8% in April, with the monthly consumer price index climbing 0.7% on the back of soaring gasoline prices linked to the ongoing conflict between the US and Iran.

"The sticky character of services inflation continues to counteract deflationary tendencies in sectors such as used vehicles," said Jim Reid, a strategist at Deutsche Bank, noting that underlying price pressures remain firm even as some energy effects fade.

The headline print surpassed the 0.6% consensus estimate, while core CPI, which strips out food and energy, also rose a faster-than-expected 0.4% month-over-month. The energy index was the primary driver, with gasoline prices jumping 5.1%, while rising jet fuel costs contributed to an 8.2% spike in airfares.

The data prompted financial markets to reprice expectations for Federal Reserve policy, reducing the odds of interest rate cuts for the remainder of 2026. The CME FedWatch Tool now implies a roughly 20% chance of a 25 basis point rate hike by the end of the year, highlighting the central bank's challenge in taming inflation amid supply-side shocks.

Energy Surge Drives Headline Inflation

The primary impetus for the April surge came directly from the energy sector, which has been roiled by persistent US-Iran hostilities and naval restrictions in the Strait of Hormuz. The price for a barrel of West Texas Intermediate crude rose more than 50 percent from the start of the conflict through the end of April.

This translated directly to consumers, with the Bureau of Labor Statistics reporting a 5.1 percent monthly increase in gasoline prices, which alone contributed 0.3 percentage points to the headline CPI figure. The impact also spilled over into services, as a sharp 8.2 percent rise in airfares was attributed to the higher cost of jet fuel.

Core Prices Remain Stubbornly High

While energy was the main story, underlying inflation proved stickier than anticipated. The core CPI's 0.4 percent monthly increase pushed the year-over-year figure to 2.8 percent, moving it further from the Federal Reserve's two percent target. A steady 0.4 percent rise in housing costs continued to provide a floor for core inflation, counteracting deflationary pressure from areas like used vehicles, where prices fell 1.1 percent.

The persistence of services inflation presents a difficult challenge for policymakers. Minneapolis Federal Reserve President Neel Kashkari has stated that price shocks from a prolonged closure of the Strait of Hormuz could de-anchor inflation expectations and require a strong policy response.

The hotter print has led investors to push back their expectations for monetary easing. "A broader oil-related price spillover across the CPI basket would materially complicate the inflation outlook," UOB Group’s Alvin Liew explains, "raising the risk that the anticipated year-end cut is pushed into 2027."

This article is for informational purposes only and does not constitute investment advice.