The prolonged Iran conflict is hurting the American consumer with the gasoline and grocery indices rising strongly to levels last seen in the Ukraine war.
Gas prices caused core inflation to run faster than expected last month, the BLS said Tuesday, in a release that portends ill from the shock leaking into the U.S. economy even as we wait for a compromise in the gulf, hoping that this could subside, deflate or at least stabilize..
No surprise for the main culprit - the gasoline index rose 5.4% from the prior month after a record-breaking 21.2% advance in March. The 3.8% advance for the broad energy index accounted for 40% of the overall, all-times increase in April. Consumers are hurting with the grocery gauge, which posted its largest monthly gain since the summer of 2022, when the world was reeling from the Ukraine war. Grocery prices rose 0.7%, the most in almost four years. Meats, dairy, fresh fruits and vegetables all posted notable gains. Food prices have made a major dent in consumers' wallets in recent years and could play into midterm elections, hopefully goading the administration to get gas prices lower.
With the hotter inflation reading, traders are increasing the odds that the Fed will hike rates by the end of the year. The probability of a 25-basis-point rate increase at the December meeting rose to 25.4% from 21.5% on Monday.
The 0.4% (0.376% unrounded) MoM increase for core CPI marked an acceleration from March, topped the official consensus and counted as the quickest since January of 2025. The 0.4% increase translates to a 2.8% annual increase. Here’s what stands out - inflation increased fast as well, in the all items basket, at 0.64% MoM and 3.8% YoY. If the pace of wage gains, which tends to be uneven, doesn't match this increase, it's going to get worse for the average American consumer, already buffeted by job opening scarcity, high healthcare and stubborn inflation.
“Consumers are pulling back on other purchases to pay for costlier gasoline, and businesses don’t have enough pricing power to raise prices. As a result, there’s an undercurrent of coolness in the core CPI — and we think that’s the more important signal for the trajectory of CPI over the next six months.”
My take is that if there is no significant compromise soon on the Iran front, this week, we’re headed into a quagmire, which is going to hurt the American economy, running only on data center spending.
I expect profit taking in the stock market in the next few weeks if we don't see any progress on oil prices. The market is running on borrowed time.
