US inflation jumps to 3.8% in April, its highest level in three years

American inflation is accelerating again. In April, the price increase reached 3.8% over one year, its highest level in three years. Soaring energy costs, fueled by tensions over Iran and disruptions in the Strait of Hormuz, are beginning to weigh on the US economy. This rise now complicates the Federal Reserve's prospects of lowering rates and reignites tensions on the financial markets.

Iranian oil shock revives American inflation

The Bureau of Labor Statistics states that almost half of the increase in inflation observed in April came from energy. The effective closure of the Strait of Hormuz, a strategic axis for global oil trade, quickly caused a surge in crude prices passed on to American consumers.

Several indicators demonstrate this growing tension on the American economy:

• US inflation at 3.8% in April compared to 3.3% in March;
• The average price of a gallon of gasoline at $4.50, a high since July 2022;
• An increase in air fares of 20.7% over one year;
• The increase in housing and food costs;
• A slight decline in the prices of new cars.

This deterioration comes in a particularly sensitive political climate for Donald Trump. The US president called the price hike a short-term phenomenon, saying Americans would understand that his priority remained preventing Iran from obtaining nuclear weapons.

Financial analysts are much more cautious. Isaac Stell, investment manager at Wealth Club, estimated that further rate increases “remain clearly possible”. Danni Hewson, head of financial analysis at AJ Bell, recalls that “Americans are extremely sensitive to the price of gasoline”.

Markets now fear a freeze on rate cuts

This inflationary surge greatly reduces the chances of monetary easing by the Federal Reserve this year. Investors were still anticipating several rate cuts to support the American economy. From now on, the scenario of a prolonged maintenance of high rates is gaining ground, with direct consequences on the financial markets. Wall Street immediately reacted to the publication of the figures: the S&P 500 opened down 0.6%, while the Dow Jones fell 0.7%.

The report published Tuesday also marks a turning point for American households. For the first time in three years, wage growth has fallen below that of inflation. Incomes increased by 3.6% over one year, compared to 3.8% for consumer prices.

This inversion fuels the risk of a slowdown in purchasing power as the midterm elections approach. It also comes a few days before the arrival of Kevin Warsh at the head of the Fed to replace Jerome Powell. According to Isaac Stell, the future president of the central bank will have “very limited room for maneuver”in an environment where every monetary decision could now have major political and financial repercussions.

In this climate of monetary and geopolitical uncertainty, bitcoin is also regaining its status as an alternative asset closely monitored by investors seeking protection against the return of inflation.

The return of energy-fueled inflation is a reminder of the extent to which global economic balances remain vulnerable to geopolitical tensions. After several months of optimism around a possible monetary pivot by the Fed, the markets must now deal with a new risk: that of a lasting oil shock capable of delaying the return to a more accommodating monetary policy.