By Lucia Mutikani
WASHINGTON, May 28 (Reuters) – U.S. inflation increased at its fastest pace in three years in April, driven by higher energy prices due to the Iran war and cementing economists’ views that the Federal Reserve would hold interest rates unchanged well into next year.
Surging price pressures are eroding household income and threatening to restrain consumer spending and economic growth this year. Income at the disposal of households after adjusting for inflation dropped for a third straight month in April, with the saving rate hitting a four-year low, other data from the Commerce Department showed on Thursday.
Given the soaring cost of living, U.S. consumers are growing frustrated with President Donald Trump’s handling of the economy. A Reuters/Ipsos survey last week showed Trump’s presidential approval rating fell to nearly its lowest level since he returned to the White House in early 2025, dented by a drop in support among Republicans. Trump won the 2024 presidential election in large part because of his promise to lower inflation.
The rising cost of gasoline and other items could undermine his Republican Party’s prospects of maintaining control of Congress in the midterm elections in November. Trump on Wednesday said he was unconcerned about the political fallout of an extended conflict with Iran.
“The inflation picture is becoming increasingly uncomfortable for the Fed,” said Olu Sonola, head of U.S. economics at Fitch Ratings. “Price pressures are likely to persist over the next few months, and while the Fed cannot fix a supply shock, it cannot ignore one that is feeding into underlying inflation.”
The Personal Consumption Expenditures Price Index jumped 3.8% in the 12 months through April, the largest rise since May 2023, the Commerce Department’s Bureau of Economic Analysis said. PCE inflation advanced by an unrevised 3.5% on a year-over-year basis in March. The increase last month was in line with economists’ expectations. The index gained 0.4% on a month-over-month basis in April after shooting up 0.7% in March.
The conflict in the Middle East has disrupted shipping in the Strait of Hormuz, boosting energy prices, as well as straining global supply chains and causing shortages of a wide range of goods, including fertilizer, aluminum and consumer products.
The national average retail gasoline price increased 12.3% in April, data from the U.S. Energy Information Administration showed. Gasoline prices have risen more than 50% since the war started in late February.
Consumers are also paying higher prices for other goods and services. Inflation was already elevated before the war, largely because of Trump’s sweeping import duties, and the pass-through from tariffs continues. Goods prices increased 0.7% last month, with the cost of gasoline and other energy products rising 5.5%.
Food prices rebounded 0.5%. Excluding the volatile food and energy components, the PCE price index increased 3.3% on a year-over-year basis in April, marking the biggest annual gain in so-called core PCE inflation since November 2023 and up from the 3.2% rise in March. Core PCE inflation gained 0.2% in April on a monthly basis after advancing 0.3% in March.
The Fed tracks the PCE inflation measures for its 2% target. Financial markets expect the U.S. central bank will keep its benchmark overnight interest rate in the 3.50%-3.75% range into 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 may need to hike rates.
Stocks on Wall Street rose amid reports the U.S. and Iran had reached an outline agreement to extend their ceasefire pending Trump’s approval. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
INFLATION ERODING PURCHASING POWER
Recreational goods and vehicle prices increased 1.6% in April, while clothing and footwear cost 0.4% more. But prices of furnishings and durable household equipment fell for a second straight month. Services prices increased 0.3% in April for the third straight month. The cost of housing and utilities rose 0.6% while prices for transportation services climbed 0.4%. Food services and accommodations prices increased 0.5%.
Surging prices are flattering the dollar amount of spending. Consumer spending, which accounts for more than two-thirds of economic activity, increased 0.5% last month after rising 1.0% in March. Gasoline and other energy goods dominated spending.
Higher gasoline prices are not yet pulling spending away from other categories, with increases in outlays on recreation services reported in April. Consumers also raised their spending at restaurants and bars. Hefty tax refunds have provided a cushion for consumers, especially lower-income households.
Consumers are also tapping into savings, with the saving rate dropping to 2.6% last month, the lowest level since June 2022. It was 3.2% in March.
Income was unchanged, with wages rising only 0.2%. Low numbers of layoffs continue to anchor the labor market. After adjusting for inflation, income at the disposal of households fell 0.5%, extending a decline that started in February.
So-called real disposable income was down 1.1% on a year-over-year basis, the biggest annual drop since November 2022.
“Consistent declines in real disposable personal income are a major headwind for consumer spending growth going forward and a potential red flag for the (economic) expansion should strong household wealth gains unexpectedly evaporate,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.
Economists expect that consumers will want to start rebuilding their savings, especially in the face of uncertainty wrought by the war. When adjusted for inflation, consumer spending edged up 0.1% in April after increasing 0.3% in March.
The government on Thursday revised down the growth pace in consumer spending in the first quarter to 1.4% from the previously reported 1.6% annualized rate. Overall gross domestic product growth was slashed to a 1.6% rate from the 2.0% pace estimated last month. Economic activity is being driven by artificial intelligence-related investment and spending by higher-income households that have benefited from rising stock prices.
A separate report from the Census Bureau showed non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.1% in April, though that drop followed outsized gains in March and February.
“The expansion continues to rest on affluent consumers, AI-driven investment and asset price appreciation,” said Gregory Daco, chief economist at EY-Parthenon. “These pillars are masking an increasingly uneven economic foundation.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao)
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