After an extended period of cooling inflation, the impact of the Middle East conflict is driving a reacceleration in prices. Headline inflation rose 0.6% in April, lifting the annual rate to 3.8% and approaching a three-year high. Similar to March, energy was the largest contributor, accounting for over 40% of the increase. The more notable development in today’s report, however, was the upside surprise in core inflation, which excludes food and energy.

Core CPI rose 0.4% in April, pushing the annual rate up to 2.8%. While it only and tentatively hints at broader price pressures, the upside surprise in core inflation suggests it may be more difficult for the Fed to gain confidence that inflation is contained, reinforcing the case for a more cautious wait-and-see approach. 

• Headline inflation rose 0.6% from the prior month, as expected, pushing the annual rate to 3.8%, the highest reading since mid-2023. Energy was the dominant contributor, reflecting the ongoing pass-through from higher crude and gasoline prices due to the Middle East conflict. Compared with last month’s 10.9% increase in energy prices, this month’s 3.8% increase was more modest, but still a clear reversal from the prior disinflationary trend that energy had provided before the war.
• Core inflation, which excludes food and energy, rose 0.4%, higher than expectations, lifting the annual rate to 2.8% (from 2.6% in March). Importantly, whereas last month’s limited move in core inflation offered some reassurance that the impact of the Middle East conflict was contained, April’s move closer to 3% has surpassed late 2025 levels, and suggests underlying price pressures could be building. As such, core inflation trends warrant closer scrutiny for policymakers and market participants, particularly as energy prices typically take time to feed through to core inflation via second‑round effects.
• Food prices reaccelerated modestly, with five of the six major grocery categories posting month-over-month increases, a notable shift from the previous month’s deacceleration. While March’s softness may have reflected some tariff relief, April’s renewed strength warrants closer monitoring amid fertilizer-related impacts stemming from the war. 
• Goods inflation was contained, providing a counterbalance to stronger food and energy increases. That said, signals across goods categories were mixed. Some tariff-sensitive categories, including apparel and computers, posted price increases, but were offset by declines in household furnishings, medical care commodities, and new vehicles. Ongoing uncertainty around trade policy remains a risk, though effects are still expected to broadly diminish over the course of the year.
• Core inflation continues to be driven primarily by services prices. Shelter costs rose again and contributed meaningfully to core CPI. Owner’s equivalent rent, a major component of shelter, posted a sharp increase in April. However, this category was significantly affected by data distortions related to the government shutdown last fall. Therefore, the spike should be interpreted with caution.
• Outside of shelter, categories such as medical care services, education, vehicle rental and maintenance, and internet services posted price declines. Water, sewer, and trash collection also showed some moderation from last month, providing some relief for households. However, energy-sensitive categories—notably airline fares—rose sharply.
• The Fed’s preferred supercore inflation measure increased by 0.5% in March, pushing the annual rate up to 3.4% from last month’s 3.1% reading. The data suggest that wage‑driven services inflation remains sticky, and with the labor market showing renewed strength last month alongside the upside surprise in core inflation, upside risks to supercore inflation warrant close monitoring. 

Today’s CPI report suggests that inflation risks tied to the Middle East conflict are becoming harder for policymakers to dismiss. Unlike March—when energy was clearly the dominant story—the April report hinted at broader price pressures, particularly in food and energy-related goods and services.

That said, it is still too soon to conclude that a sustained inflationary cycle is underway. There are some mitigating factors, particularly across broader goods and select services. Importantly, inflation expectations remain anchored. 

Still, the Fed is likely to proceed with caution. With headline inflation now at its highest level since 2023 and core inflation remaining above the Fed’s target for five years, the implications for policy are consequential—especially given that the situation in the Middle East remains fluid and transit through the Strait of Hormuz is still limited. 

Today’s report thus reduces the likelihood of rate cuts in the near term. While the Fed typically looks through energy price shocks, any further evidence of pass-through into core inflation would argue for the Fed holding rates steady through 2026. Although we have already pushed our base case for the next rate cut to December, the risk is rising that it will be 2027 before we see any further policy easing from the Fed.