After two painful inflation reports this week, some economists think that inflation could push even higher in the coming months — bad news for consumers and for President Donald Trump.
The war in Iran and subsequent energy price increases have pushed up headline inflation to levels not seen since 2023. And a big question on the minds of economists, consumers, and politicians is whether it has peaked or if it could keep getting worse.
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“I don’t think we’ve hit the peak,” Stephen Kates, a financial analyst at Bankrate, told the Washington Examiner.
This week was a big one for inflation news.
First, the most closely watched consumer price index showed that annual inflation spiked by 0.5 percentage points to 3.8% for the year ending in April. The April inflation reading was the highest since May 2023. In March alone, prices rose 0.9%.
And on Wednesday, the producer price index showed wholesale inflation shot up to a blistering 6%, the biggest increase since 2022. It increased an astonishing 1.4% in April alone.
“That’s a holy cow reading,” Ryan Young, senior economist at the Competitive Enterprise Institute, told the Washington Examiner. “And as that works its way through supply chains up from the wholesaler level, and then on to retail and consumers, that’s a sign that the next few CPI readings are likely to continue being high.”
A lot of this massive run-up in inflation is directly attributable to the war in the Middle East and supply disruptions related to the Strait of Hormuz.
Energy prices have shot up in recent months because of the war with Iran — a barrel of oil was about $65 before the war and punched over $100 last month when the latest inflation reports were taken.
Consumers are feeling the pinch. In January, before the war, average gas prices in the United States reached $2.78 per gallon, according to the Energy Information Administration. As of early May, they have punched up to $4.45 per gallon, a 60% increase.
The bigger concern is that the longer the conflict drags on and energy prices are elevated, the more inflation will start to show through in other goods.
For instance, when food is shipped somewhere, it now costs more to move because diesel fuel is more expensive, which can eventually result in higher prices at grocery stores.
“The longer that the conflict goes on, the more all of this is going to — oil prices, diesel prices, jet fuel prices — will trickle into the rest of the economy, and that’s probably where a lot of this is now going to come from, in terms of sort of direct impacts,” Kates said.
But there is also another element at play: Inflation was still being propped up above the Federal Reserve’s 2% target before the war in Iran began, further complicating the inflation landscape.
Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, told the Washington Examiner that there are deeper issues regarding the country’s fiscal situation.
“The problem is that inflation started ticking back up before the war in Iran, and that I think is a continuation of the problems that started the inflation in the first place, and I think that’s the fiscal side,” de Rugy said.
De Rugy made a point of noting that deficits remain an issue and that Congress has done little to rein in spending.
“I think the conditions are there because Congress continues to signal that it’s not serious about controlling the fiscal side, the deficit is going up, right? No one is talking about austerity,” she said.
And in a best-case scenario, if the situation with Iran is resolved and the strait opens, there are longer-term infrastructure concerns that could prevent energy prices from falling quickly, according to Kates.
“The damage that was done to the energy production infrastructure in the Middle East … the damage done to that is going to take so long to correct, refineries have been destroyed, pumping equipment destroyed or impacted in some way — that isn’t going to be fixed in a matter of months, it’ll be years,” Kates said.
The whole situation is obviously negative for consumers and for Republicans heading into the midterm elections.
Trump’s economic approval ratings have fallen dramatically since he entered office, in large part because of voter discontent over affordability. The higher inflation prints could imperil Republicans in the midterm elections.
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But there is some optimism that the current wave of inflation won’t be nearly as bad as the one experienced under former President Joe Biden, when inflation spiked at multi-decade highs.
“That’s because that kind of inflation requires some shenanigans at the Federal Reserve, and who knows what Warsh is going to do, but I think he’s competent enough where he’s not going to mismanage things by cutting interest rates or growing the balance sheets more than he should,” Young said.
