Searing U.S. energy prices are driving the hottest inflation in years
The global oil supply shock stemming from the Iran war is scorching U.S. motorists and other consumers, new federal data makes clear.
Higher energy prices accounted for 40% of the total jump in inflation in April, when the Consumer Price Index surged at an annual rate of 3.8% — the fastest increase in nearly three years.
The index for gasoline prices last month was up more than 28% from a year ago, the Department of Labor found. Overall energy costs — which includes gas, heating oil and electricity — last month rose nearly 18% from a year ago.
For millions of workers, the spike in prices over the last two months means inflation is now outpacing wage growth, Wall Street analysts noted.
“That is a very clear illustration of the impact that higher energy prices are having in squeezing households’ real wages,” Brian Coulton, chief economist at Fitch Ratings, said in an email, warning that headline inflation could top 4% by the time the government releases the next CPI report in early June if oil prices remain elevated.
A gallon of gasoline around the country now costs an average of $4.50, up more than $1.50 since the war started, according to AAA. And in a forecast on Tuesday, the U.S. Energy Information Administration estimated that retail gas prices will average $3.88 per gallon over the rest of the year and $3.62 per gallon in 2027.
Before the Middle East conflict erupted in February, the national average for a gallon of gas hovered just below $3.
Patrick De Haan, a petroleum expert at GasBuddy, estimates that Americans have spent an additional $28 billion on gas since March 1 due to higher prices. Of that figure, he estimated that $22 billion in additional fuel costs stem directly from the Iran war.
Trump administration officials have said they expect the disruption in oil flows due to the Middle East conflict to be temporary and that U.S. gas prices will quickly recede once crude supplies resume.
“The April CPI report reinforces, however, that President Trump’s long-term economic agenda continues to deliver despite these disruptions: Drug and hospital services prices are declining thanks to the President’s Most-Favored-Nation and price transparency initiatives, while trillions in investments continue to drive robust real wage growth for manufacturing and construction workers,” White House spokesman Kush Desai said in a statement to CBS News.
Pain beyond the pump
Electricity prices around the U.S. also are shooting up, rising an average of 6.1% in April from a year ago. The increase comes as technology companies race to boot up data centers capable of supplying the vast amounts of energy needed to power AI services.
In a recent report, Goldman Sachs analysts said they expect increased electricity demand from the data center boom to boost inflation over the next two years.
Airfares are another area where consumers are feeling the sting, with ticket prices up nearly 21% in April from a year ago, the CPI data shows. Airlines are hiking their prices to absorb higher jet fuel costs, which are up by more than $1.50 since before the war started, according to data from Airlines for America, a trade association.
Consumers could also see higher grocery prices as the Iran war drives up the cost of diesel, which is widely used in transportation, shipping and agriculture. Diesel averaged $5.64 a gallon on Tuesday, just 18 cents below its record high in June 2022, according to AAA.
Food prices in April were up 3.2% from a year ago, according to the latest CPI data.
Where could inflation go from here?
Economists expect U.S. inflation to accelerate in the coming months as the impact from the war works its way through the economy.
“Even if the war in Iran were to end today, the tail of the economic crisis it has created will last months or longer, from gasoline to food to utility prices,” Janelle Jones, visiting senior fellow at the progressive Century Foundation and former chief economist at the Department of Labor, said in an email.
Gregory Daco, chief economist at EY-Parthenon, thinks the annual rate of inflation will surpass 4% in May, while core inflation (which strips out volatile food and energy costs) will approach 3%. Core inflation in April was 2.8%, just above the 2.7% predicted by economists polled by FactSet.
With inflation drifting further from the Federal Reserve’s 2% target rate, many economists now predict the central bank won’t cut interest rates at all this year.
