Fed's preferred inflation gauge worsens as Iran war sends food, energy prices surging

• Gasoline prices surged 12.3% in April alone and are up more than 50% since the Iran war started, disrupting shipping through the Strait of Hormuz and straining global supply chains
• Core PCE inflation (excluding food and energy) rose 3.3% year-over-year, while consumer spending growth slowed to 0.5% in April from 1.0% in March as higher prices squeeze household budgets
• Financial markets expect the Fed to hold rates steady in the 3.50%-3.75% range into 2027, though recent Fed minutes show growing openness among policymakers to potential rate hikes

Summary: Fed's Preferred Inflation Gauge Rises to 3-Year High

Key Data Points

The Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation measure, jumped 3.8% year-over-year in April 2026, marking the highest increase since May 2023. Month-over-month, PCE rose 0.4%, while the March figure remained at 3.5%. Core PCE (excluding food and energy) increased 3.3% annually and 0.2% monthly.

Primary Drivers

An ongoing Iran conflict that began in late February has severely impacted energy markets and supply chains. The war disrupted shipping through the Strait of Hormuz, causing:

• Retail gasoline prices to surge 12.3% in April
• Overall gasoline price increases exceeding 50% since the war started
• Shortages in fertilizers, aluminum, and consumer products

Inflation was already elevated prior to the conflict due to President Trump's import tariffs.

Market Implications

Financial markets anticipate the Fed will maintain interest rates in the 3.50%-3.75% range into 2027, with recent Fed minutes indicating policymakers are considering potential rate hikes. Consumer spending, representing over two-thirds of economic activity, slowed to 0.5% in April from 1.0% in March, suggesting inflation is dampening consumption.

Political Impact

Trump's approval rating has fallen to near-record lows, particularly among Republicans. This poses significant risks to Republican congressional majorities in November midterm elections, as Trump's 2024 election victory centered on promises to reduce inflation. Current economic conditions threaten this mandate as consumers deplete savings and face wages lagging behind inflation.