Inflation Hits 3.8%, Consumer Sentiment at Record Low

Inflation in the United States has accelerated to its highest level in three years while American consumer confidence has simultaneously fallen to a historic low, as the ongoing war with Iran drives up energy costs and erodes household purchasing power across the economy.

The Commerce Department reported Friday that the Personal Consumption Expenditures (PCE) price index — the Federal Reserve’s preferred inflation gauge — rose to 3.8% annually in April, up from 3.5% in March and the highest since May 2023. On a monthly basis, prices climbed 0.4%, driven overwhelmingly by energy costs linked to the conflict in the Middle East.

The Energy Shock Driving Prices Higher

The U.S.-Iran war, which broke out in March 2026, has fundamentally altered the economic landscape by disrupting oil tanker passage through the Strait of Hormuz — a critical chokepoint through which roughly 20% of the world’s oil flows. Crude oil prices have surged above $100 per barrel, pushing the national average gasoline price to approximately $4.50 per gallon.

According to CNBC, energy prices jumped 3.8% in April alone, accounting for more than 40% of the headline Consumer Price Index gain. Gasoline prices have risen 28.4% over the past year. The impact is rippling well beyond the pump: airline fares have accelerated 20.7% annually, food-at-home prices posted their biggest monthly gain since August 2022, and shelter costs rose 0.6% after easing in prior months — signaling that inflation is broadening beyond energy.

Mark Zandi, chief economist at Moody’s Analytics, told CBS News that the pass-through will extend to nearly all manufactured goods. “The pass-through will broaden to nearly all manufactured goods, which are energy-intensive, as well as to agriculture and construction,” he said.

Consumer Confidence at Historic Lows

The financial strain on American households is starkly reflected in sentiment data. The University of Michigan’s Consumer Sentiment Index fell to a record low of 44.8 in May — the lowest reading since the survey began in 1952, according to CNBC. The index dropped sharply from a preliminary reading of 48.2 and sits well below the 49.8 level recorded at the end of April.

“Consumer sentiment fell for the third straight month as supply disruptions in the Strait of Hormuz continue to boost gasoline prices,” said Joanne Hsu, director of the University of Michigan Surveys of Consumers. “Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.”

Indeed, one-year inflation expectations rose to 4.8% in May, up from 4.7% in April and well above the 3.4% reading in February before the war began. Longer-term inflation expectations climbed to 3.9%, up from 3.5% — a troubling sign for policymakers who view anchored long-term expectations as critical to price stability.

The Conference Board’s consumer confidence index also slipped 0.7 points to 93.1 in May, marking its first decline after three months of gains, as AP News reported. Some 57% of consumers spontaneously cited high prices as eroding their personal finances.

Real Wages Decline as Inflation Outpaces Pay

For the first time in three years, inflation has overtaken wage growth. Real average hourly wages slipped 0.5% monthly and fell 0.3% annually, according to the Bureau of Labor Statistics data cited by CNBC and CBS News. The average household is spending an estimated $75 more per month on gasoline alone.

“Inflation is the key drag on the U.S. economy now,” said Heather Long, chief economist at Navy Federal Credit Union. “This is hurting Americans. There is a real financial squeeze underway. For the first time in three years, inflation is eating up all wage gains. This is a setback for middle-class and lower-income households and they know it.”

The labor market, while still relatively stable, shows signs of softening. Initial jobless claims rose to 215,000 for the week, up from 210,000 the prior week, and continuing claims increased by 15,000 to 1.79 million. Job growth in 2025 averaged fewer than 10,000 jobs added per month — the weakest hiring outside recession years since 2002.

The Federal Reserve’s Policy Dilemma

The Federal Reserve faces an extraordinarily challenging policy environment. At its April 29 meeting — Jerome Powell’s last as chair — the central bank voted 11-1 to hold interest rates steady at 3.50%–3.75%, as reported by Fox Business. The meeting produced four dissents, the highest since 1992, reflecting deep divisions within the committee.

Fed Governor Stephen Miran dissented in favor of a quarter-point cut, while three regional presidents — Cleveland’s Beth Hammack, Minneapolis’s Neel Kashkari, and Dallas’s Lorie Logan — objected to language suggesting a bias toward easing. The dissents underscore the difficulty of navigating what Powell described as “four supply shocks”: the pandemic, the Ukraine invasion, tariffs, and now the Iran war.

Powell’s term as chair expired on May 15, with former Fed Governor Kevin Warsh nominated by President Trump to succeed him. At his final press conference, Powell struck a cautious tone on rate policy. “The question about looking through energy really is not in front of us right now, it hasn’t even peaked yet,” he said, adding that the Fed would want to “see the back side of that and progress on tariffs before we even thought about reducing rates.”

Market expectations have shifted dramatically. CME FedWatch data shows less than a 50% chance of rate cuts until March 2027, with roughly 30% odds of a rate hike by the end of 2026. Bank of America has forecast that the Fed won’t lower rates until the second half of 2027.

“Given that inflation is heading in the wrong direction and the labor market is holding up, it’s very unlikely that the Fed will be able to lower interest rates any time soon,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management. “It’s possible that we may start pricing in rate hikes for next year.”

The Wall Street-Main Street Divide

One of the most striking features of the current economic landscape is the divergence between financial markets and household sentiment. The S&P 500 has been hovering near all-time highs, heading for its ninth straight winning week — the longest such streak since 2023. The Atlanta Fed’s GDPNow tracker points to economic growth of 3.7% in the second quarter.

Yet this resilience may have limits. Higher mortgage rates — the 30-year fixed rate rose to 6.53%, the highest in nine months — are adding hundreds of dollars to monthly borrowing costs for homebuyers. And with real wages declining and inflation expectations rising, consumer spending — the engine of the U.S. economy — faces mounting headwinds.

Political Implications

The economic data carries significant political weight with midterm elections just five months away. Americans have soured on President Trump’s economic policies, polls show, and the president has proposed suspending the federal gas tax to provide relief — though experts say the impact would be limited.

James McCann, senior economist at Edward Jones, offered a cautiously optimistic view. “The good news is that the economy looks resilient to this price shock so far,” he said. “Many consumers have benefited from tax refunds this year, hiring has picked up from near stagnant rates in 2025 and businesses are generating robust profit growth. There are limits to these buffers, but we expect they should provide some reassurance that the economy can weather this shock.”

What to Watch

The trajectory of the U.S.-Iran war remains the single biggest variable. A quick resolution could ease energy prices and relieve pressure on households, while escalation could push inflation higher and potentially tip the economy into recession. The confirmation and policy stance of incoming Fed Chair Kevin Warsh will also be closely watched, as will the midterm election campaign’s focus on economic issues.

For now, American households are navigating a painful reality: prices are rising faster than paychecks, confidence is at rock bottom, and the path forward depends on geopolitical developments largely beyond their control.