The higher-than-expected rise in U.S. CPI inflation for April has further dampened market expectations for Federal Reserve rate cuts within the year. Journalist Nick Timiraos, often referred to as the "new Fed whisperer," noted that the April CPI report will not fundamentally shift the stances of Fed hawks or doves. However, if data in the coming months continues in this vein, it will put doves advocating for maintaining accommodative expectations in a more difficult position.
According to the U.S. Bureau of Labor Statistics (BLS) data released on Tuesday, the CPI rose 3.8% year-over-year in April, marking the largest monthly annual increase in nearly three years. This exceeded the market forecast of 3.7% and was significantly higher than the 3.3% increase recorded in March. Prices for gasoline, groceries, rent, and airfare all saw notable increases in April. The inflation surge outpaced wage growth, with real average hourly earnings declining 0.3% year-over-year, the first negative reading in three years.
Timiraos pointed out that this CPI report is the latest signal indicating that the market's previously priced-in expectations for rate cuts are no longer a prospect for 2026. This presents a challenging policy legacy for Kevin Warsh, who is set to take over leadership of the Fed next week. President Trump, who nominated Warsh for the Fed chairmanship, has already clearly expressed a strong desire for the central bank to cut rates.
Timiraos emphasized that the Fed's current real concern is not the single-month CPI data itself, but the potential resurgence of public expectations for future inflation. He noted that if consumers and businesses begin to believe high inflation will persist, companies may raise prices more aggressively and workers may demand higher wages, potentially creating a more entrenched wage-price spiral. In such a scenario, the Fed would find it difficult to cut rates quickly even if economic growth slows.
**Services Inflation Resurgence Challenges Dovish Narrative**
In his analysis, Timiraos focused on shifts in the structure of inflation. He observed that price pressures for goods in the April CPI were moderate, which superficially supports the argument that tariffs have not yet triggered a new wave of price increases. This was a key premise for centrist Fed officials when assessing future inflation trends.
However, prices for services excluding energy and housing rebounded in April, complicating the dovish argument. The core narrative for doves had been that inflationary pressures would be confined to the goods sector, reasonably explained as lingering effects of tariffs that are fading, thus allowing the Fed to maintain a dovish stance without needing to discuss rate hike scenarios.
Timiraos stressed that services inflation is harder to dismiss, as it often reflects domestic demand conditions rather than one-off supply shocks. He specifically highlighted the significant jump in airfare prices—which could stem from higher jet fuel costs due to the Iran conflict or reflect broader domestic price pressures—making the signal difficult to interpret and further clouding policy judgment.
**Iran Conflict Impacts Energy and Supply Chains**
Multiple media reports indicated that energy remains the core driver of the current inflation uptick. Reports suggest that U.S. gasoline prices have risen significantly over the past months due to escalating Middle East tensions and risks to transport through the Strait of Hormuz. Energy prices in April rose 17.9% year-over-year, the largest increase since 2022.
Further reports note that the impact of the Iran conflict is profoundly affecting the U.S. economy, with energy costs rising sharply. BLS data shows gasoline prices have increased nearly 28% over the past two months. Groceries, rent, and airfare all saw significant month-over-month increases, with notable rises in meat, dairy, and fresh produce. Grocery prices rose 0.7% month-over-month in April, the largest increase in nearly four years.
There is widespread concern on Wall Street that the energy shock is spreading to broader areas. Beyond gasoline, costs for transportation, food, and some manufacturing sectors are beginning to be affected.
Economists at Bloomberg Economics believe current U.S. inflation is no longer just an "oil price issue" but is starting to show broader second-round effects, particularly in rent and food.
Data shows housing costs continue to be a significant contributor to core inflation, while food prices have also risen noticeably. Some analysts point out that food inflation often lags by several months after energy price increases drive up transportation and agricultural costs.
Gus Faucher, Chief Economist at PNC Financial Services Group, stated, "Inflation, which we thought was under control, is reaccelerating. This is a real problem. The longer inflation stays elevated, the more pressure it puts on consumers."
Analysts cited in reports suggest that even if a current ceasefire holds and the Strait of Hormuz reopens promptly, prices may remain elevated for months—oil production recovery takes time, and shipping logistics need to gradually recover. Additionally, rising fertilizer prices are expected to push up food bills, and high oil prices may lead to higher prices for more goods and services through transportation cost pass-through.
**Special Distortions in Airfare and Rent Data**
Within the April CPI data, airfare prices rose 2.8% month-over-month, and hotel prices increased 2.8%, the largest rise in 2024. Overall services prices excluding energy and housing rose 0.5% month-over-month.
The rent data was affected by a statistical factor: according to Bloomberg-compiled data, housing costs rose 0.6% month-over-month in April, the largest increase in over two years, partly due to statistical distortions lingering from the 2025 government shutdown. Because the BLS uses a rolling sample to collect rental data, data collection was interrupted during the October shutdown last year, and related samples were not updated. When the data was recorded in April this year, it captured about a year's worth of rent increases at once, causing the month-over-month change to be roughly double the normal level.
Core CPI, which excludes food and energy, rose 0.4% month-over-month and 2.8% year-over-year in April, with part of the increase stemming from the aforementioned rent statistical distortion.
Anna Wong, Chief U.S. Economist at Bloomberg Economics, and economist Troy Durie noted, "Consumers are cutting back on other spending to cope with rising gasoline costs, and businesses lack sufficient pricing power to pass on costs. Therefore, there is a mild undercurrent within core CPI, which we believe is a more important signal for CPI trends over the next six months."
**Future Fed Discussions Hinge on Persian Gulf Commodity Transport Normalization**
Regarding tariff impacts, core goods prices excluding food and energy were flat month-over-month in April, with new car price declines being the main drag. Price increases for categories more sensitive to tariffs, such as apparel and toys, moderated compared to March, while used car prices were largely flat. Economists have been observing whether retailers have largely completed passing on the costs of Trump-era tariffs, but the risk remains that high oil prices could push goods prices higher again later in the year.
Timiraos' judgment on the policy outlook is quite clear: this report is a definitive signal that the market's priced-in expectations for rate cuts in early 2026 can no longer be realized this year. In his view:
The future situation largely depends on whether the transport of fuel and various commodities through the Persian Gulf can return to normal. If it does, the assessment of the inflation situation will quickly become clearer, as policymakers would no longer need to worry about 'second-round effects' triggered by surging energy prices and goods shortages.
Conversely, if transport disruptions persist, with policy rates held steady, continuously rising inflation will keep pushing down real interest rates—the inflation-adjusted rate level. This would objectively achieve policy easing even without the Fed taking any substantive action. In such a scenario, it would be difficult for the Fed's policy-setting committee to continue marginalizing the issue of rate hikes in internal debates.
Currently, futures markets show investors have very limited expectations for another rate cut in 2026, though some economists still predict one possible cut this year. The Fed's preferred core inflation gauge—the Personal Consumption Expenditures (PCE) price index—treats the housing component differently from the CPI. The Producer Price Index (PPI) to be released on Wednesday will provide additional information for several components, including airfare, which feed directly into the PCE data to be released later this month.
**Wall Street: Rate Cut Expectations Continue to Recede**
Following the CPI release, interest rate markets quickly adjusted their expectations for the Fed's policy path.
Analysts cited in reports said traders are increasingly leaning toward the view that the Fed may not cut rates at all this year, and if it does, it's more likely to be delayed until later in the year.
Some Wall Street institutions have even begun revisiting the question of "whether another rate hike is needed."
Strategists at Morgan Stanley believe that although economic growth has not significantly weakened yet, if oil prices remain high and core services inflation stays strong, the Fed may have to maintain high interest rates for a longer period.
Analysis suggests the Fed currently faces a classic "dilemma": on one hand, high oil prices are eroding consumer purchasing power and dragging on the economy; on the other hand, resurgent inflation limits the Fed's room for easing.
A Reuters Breakingviews column noted that this CPI data further illustrates that the U.S. economy has not truly shaken off the "post-pandemic era's high inflation inertia."
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