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

By Alicia Wallace, CNN

(CNN) — The Iran war’s oil price shock pushed the Federal Reserve’s preferred inflation gauge to 3.8% last month, its highest rate in nearly three years, new data showed Thursday.

The Personal Consumption Expenditures price index rose 0.4% in April from the month before, a deceleration from the 0.7% increase recorded in March. At 3.8%, the annual rate of inflation is the highest since May 2023.

When stripping out gas and food costs, a closely watched measurement of underlying inflation ticked up to 3.3% for the year ending in April.

The latest monthly report from the Commerce Department also showed that consumers took their foot off the pedal: Spending rose 0.5% in April, a retreat from a 1% jump the month before.

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

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.

Gas prices continued to rise in April; however, it was expected that Americans’ wallets – many fatter from bigger tax refunds – eventually wouldn’t be able to keep up with climbing costs.

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 largely 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.

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.