War-driven price shock sent April inflation to highest level in nearly three years

By Alicia Wallace, CNN

(CNN) — High gas prices pushed up inflation again last month while adding to Americans’ financial strain: Households are saving at the lowest rate in nearly four years, a new report showed Thursday.

The Iran war’s oil price shock lifted the Federal Reserve’s preferred inflation gauge to 3.8% in April from 3.3% the month before, according to Commerce Department data.

The Personal Consumption Expenditures price index rose 0.4% on a monthly basis, slowing from a 0.7% increase in March.

Consumer spending, which powers about two-thirds of the economy, rose 0.5% in April – a seemingly resilient but slower pace than the 1% jump in March.

When taking inflation into account, however, spending rose just 0.1%.

Americans’ wallets – many fatter from bigger tax refunds – have been able to absorb the fuel price shock; however, economists have warned that they eventually wouldn’t be able to keep up with climbing costs.

Thursday’s data exposed some of that underlying fragility.

Consumers’ incomes were flat for the month; disposable (after-tax) income fell by 0.1%; and inflation-adjusted disposable income dropped by 0.5%.

Americans continued to tap their piggy banks: Their personal saving rate (saving as a percentage of after-tax income) dropped to 2.6% in April, marking the lowest rate since June 2022, when inflation hit a four-decade high.

“Americans are being squeezed financially. Inflation is at a three-year high and personal savings has cratered to one of the lowest levels in the past 20 years,” Heather Long, chief economist at Navy Federal Credit Union, wrote in a note Thursday. “Many Americans are spending more than the income they have coming in. This is not sustainable, especially for lower-income and middle-class households.”

Inflation moving in the wrong direction

Economists were expecting that inflation would rise 0.5% on a monthly basis and 3.9% from the year before and that spending would slow to 0.3%, according to FactSet.

Much of last month’s spending increase was on gas and other essentials: Fuel, energy, utilities, housing and food accounted for roughly half of the spending gains. However, consumers didn’t pull back on most discretionary purchases and increased their spending on recreation and restaurants, Thursday’s report showed.

The US-Israeli war with Iran has sent shockwaves through the global economy. Shipping traffic in the Persian Gulf and the Strait of Hormuz has slowed to a trickle, choking off a vital waterway for the trade of oil, natural gas, fertilizer and other critical materials.

The war-driven shock has sent gas prices sharply higher, started to push up the price of food (notably fresh produce) and threatens to make other goods and services more expensive.

Gas and food prices can be quite volatile, so economists and policymakers often look to a “core” pricing gauge that removes those categories to help get a better sense of underlying inflation trends.

The core PCE price index rose at a slower-than-expected rate of 0.2% for the month, but the annual rate moved higher to 3.3%.

Underlying inflation continues to move higher in part because of President Donald Trump’s slew of tariffs on imported goods, Stephen Juneau, senior US economist at Bank of America Securities, wrote in a note to investors this week.

Rising prices, sluggish income and increased economic uncertainty could set the stage for a broader pullback in consumer spending, said Elizabeth Renter, senior economist at NerdWallet.

“Inflation appears to be quickening, both due to the oil price shock and its downstream effects, and the ongoing impact of tariffs,” she wrote in commentary Thursday. “While prices are rising faster than comfortable, incomes are not, putting consumers in an uncomfortable spot.”

A separate report from the Commerce Department on Thursday showed that the US economy grew at a slower pace than previously reported in the first quarter. The revised estimate for gross domestic product factored in weaker consumer spending and business investment during that period.

GDP registered an annualized rate of 1.6% in the January-through-March period, down from the 2% rate initially reported but still up sharply from the 0.5% in the prior quarter.

Resilient consumers and businesses investing heavily in AI helped juice growth in the first quarter, and that momentum likely persisted into the second quarter stretching from April through June. The Federal Reserve Bank of Atlanta estimates second-quarter GDP to register at a robust 4.3%.

This story is developing and will be updated.

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CNN’s Bryan Mena contributed to this report.