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Not surprisingly, inflation picked up to 3.8% in April and will likely exceed 4.0% in May’s report, due next month. Gasoline prices rose 5.4% in April. The Iran war is still preventing ship traffic into and out of the Persian Gulf, which supplies 20% of the world’s oil consumption. Some is getting out through pipelines, but more than half is currently stuck. Unless something changes, gasoline and other fuel prices will continue rising in the coming months. Food prices will also start rising in the future, as one-third of the world’s fertilizer supply is produced in the Persian Gulf region, along with 10% of aluminum, used in everything from jets to soda cans. Once the Strait of Hormuz is cleared for ship traffic again, don’t expect a quick return to prewar gasoline prices. Full normalization of energy costs could take well into 2027 because of extensive damage to energy infrastructure in the Middle East.
Excluding food and energy, the rest of April’s price report was fairly benign. Health care costs were unchanged for the second month, and new-vehicle prices edged down, while used-vehicle prices were unchanged. Tariffs on imported goods that were implemented more than a year ago are no longer being counted as part of the inflation rate, meaning that price increases on home furnishings, tools and sporting goods have largely disappeared, and those on clothing and toys will likely follow in the near future. There was a large 2.8% monthly rise in airfares (and a 12-month jump of 20.7%), but that was because of rising fuel costs.
The jump in shelter costs in April will not be repeated, because it was related to a statistical quirk, coming exactly six months after the government shutdown prevented collection of October price data. Shelter costs will likely return to their normal pace of moderate increases.
The Federal Reserve will not cut interest rates at its policy meetings for the rest of the year, and may consider rate hikes, given the long-lasting impact of oil price increases on inflation. The Fed generally discounts energy price fluctuations in its deliberations on interest rate policy. But the central bank will also note that “core” inflation (excluding food and energy) is likely to creep upwards as the year progresses. The measure of inflation that the Fed watches, personal consumer expenditures excluding food and energy, came in at 3.2% for March, and will likely be higher when the April data are released on May 28. The Fed wants so-called core PCE inflation to come in at 2%, so it was already well off its benchmark before the Iran war caused energy prices to spike.
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