Iran war keeps Fed's inflation gauge above 2% target in April

The Fed's preferred inflation gauge remained above its 2% target in April, as the Iran war-driven energy shock delayed the return to price stability.

The Fed's preferred inflation gauge rose at a slower pace in April but held above the central bank's 2% target, as the Iran war-driven energy shock continued feeding through to consumer prices and pushing rate-cut expectations deeper into 2026.

"The energy shock caused by the Middle East conflict will likely have a persistent impact on inflation even if there is a quick solution to the war," the Wall Street Journal reported, citing economists tracking the conflict's economic fallout.

The personal consumption expenditures price index — the Fed's preferred inflation measure — rose at an annualized pace that remained above the central bank's 2% target in April, according to data released May 28. The reading comes as the US-Israeli war with Iran continues to disrupt energy markets, with crude prices adding to cost pressures across transportation and food supply chains. Gasoline prices have surged at the pump, and economists warn another inflation wave is building in grocery prices as higher energy costs and adverse weather drive food costs higher.

The persistent above-target reading reduces the likelihood of near-term Fed rate cuts, keeping the federal funds rate elevated. Higher-for-longer interest rates typically pressure risk-asset valuations, with both equities and crypto facing headwinds as markets price out rate cuts. The next Fed meeting will be closely watched for any shift in forward guidance on the inflation outlook.

The April reading marks the latest in a series of inflation prints that have remained stubbornly above the Fed's target since the Iran conflict escalated energy prices. The war between the US and Israel against Iran has disrupted crude shipments through the Strait of Hormuz, a chokepoint for about a fifth of global oil supply, sending benchmark prices higher and feeding through to downstream costs.

"Always Mind the Lag: The Fed and the market are reading them as one transitory story. They are not," one analyst wrote, referring to the persistent nature of the current inflation wave. The lag between energy price shocks and their full pass-through to core inflation means the worst may still be ahead for the Fed's preferred measures.

The inflation data complicates the Fed's communication challenge. With the labor market still showing resilience and consumer spending holding up, the central bank has limited room to signal rate cuts without risking a reacceleration of price pressures.

This article is for informational purposes only and does not constitute investment advice.