The April inflation report landed hot, and the immediate culprit is plain: energy prices jumped as the war with Iran pushed gasoline and oil higher. The consumer price index rose 0.9 percent in March and 3.3 percent from a year earlier, the biggest monthly surge in nearly two years, with gasoline alone accounting for most of the increase.
That leaves the Federal Reserve staring at the worst kind of combination, firmer inflation and a still-decent labor market. Core inflation, which strips out food and energy, was cooler at 0.2 percent for the month and 2.6 percent year over year, but the broader picture is getting harder to ignore. Economists expected a 3.4 percent annual reading, and the pressure is being felt in the data the central bank watches most closely.
There are already signs the shock is spilling beyond the pump. The Guardian reported that the Institute for Supply Management’s prices index jumped to 70.7 in March from 63 in February, the biggest one-month rise in 13 years, while the University of Michigan’s consumer confidence survey fell 10.7 percent to a record low. Consumers, in other words, are seeing the war as a bill arriving in real time, and companies are starting to feel it too.
For policymakers, the tradeoff is brutal: hold rates steady and risk letting inflation stick, or tighten again and test a labor market that still added 178,000 jobs in March with unemployment at 4.3 percent. Fed minutes already showed some officials worrying that prolonged inflation could justify higher rates. The next few data releases will tell whether this is a one-off energy shock, or the start of something much uglier.
