US inflation jumps to 3.8% in April as Iran-war energy shock erodes wages

US consumer prices rose faster than expected in April, the Bureau of Labor Statistics reported on May 12, as a renewed surge in energy costs from the conflict with Iran pushed annual inflation to its highest level in nearly three years. The consumer price index climbed 0.6% on the month and 3.8% from a year earlier, up sharply from 3.3% in March and above the 3.7% economists had anticipated.

The annual rate marked the steepest since May 2023 and underscored how quickly the energy shock was feeding through to the broader economy. Just before the late-February strikes on Iran, inflation had cooled to 2.4%; it then leaped in March and accelerated again in April, reversing much of the progress made over the prior year and complicating the outlook for both households and policymakers.

Energy was the principal driver. Energy prices jumped 3.8% on the month and were up 17.9% over the year, accounting for more than 40% of the headline increase, with the gasoline index alone rising roughly 28% from a year earlier. The pressure extended beyond the pump: food prices rose 0.5% on the month and 3.2% annually, with grocery costs posting their biggest monthly gain since 2022 and staples such as beef climbing sharply, hitting consumers in categories where spending is hard to avoid.

Underlying inflation also firmed. Core CPI, which strips out food and energy, rose 0.4% on the month and 2.8% from a year earlier, keeping it well above the Federal Reserve's 2% target. Economists noted that part of the monthly jump in core reflected a statistical quirk in the shelter component tied to an earlier gap in data collection, but even allowing for that, the report pointed to price pressures broadening beyond the energy complex.

Perhaps the most striking takeaway was the hit to household purchasing power. Real average hourly earnings fell 0.5% on the month and were down 0.3% over the year, meaning that for the first time in three years, wage growth was no longer keeping pace with inflation. That erosion of real incomes amplified the affordability strains weighing on consumers already fatigued by years of elevated prices.

The data sharpened the dilemma facing the Federal Reserve. With inflation reaccelerating and the energy shock showing few immediate signs of fading, the report undercut the case for the rate cuts that markets had anticipated earlier in the year and kept alive the prospect that policy could stay restrictive for longer. The challenge for officials was distinguishing between price pressures that might prove temporary, tied to the conflict, and those at risk of becoming embedded.

Economists cautioned that the inflationary effects of the war could take time to unwind even in a favorable scenario. Some suggested that if the conflict were resolved relatively soon, it might still take a couple of months for supply chains to normalize, while a more drawn-out disruption could keep prices elevated for far longer. The reopening of shipping routes through the Strait of Hormuz was seen as a necessary but not sufficient condition for relief.

For markets, the April print reinforced a now-familiar dynamic in which energy-driven inflation supported the dollar and Treasury yields by reducing the odds of near-term easing, even as it darkened the growth outlook. With the May inflation reading and the path of the conflict still ahead, the report set the stage for a tense stretch in which each data release and geopolitical headline carried outsized weight for the trajectory of US monetary policy.