The US inflation rate has jumped to 3.8% in April, the highest in two years, as the war in Iran pushes up energy costs. Oil prices have fallen back from their highs, but the full effect on prices has yet to be felt. The average price for gasoline in the US is now about 37.5% higher than a year ago, and the average diesel price is 55% higher.

In the US, economic growth numbers for the first quarter of the year, which included only the first month of the spike in oil and gas prices, were revised down late last week. The numbers were already lukewarm, and the revision made them even weaker. The revised numbers show that the US economy is facing significant challenges. The underlying weakness in the broader economy is a concern, particularly since consumer spending accounts for about 70% of US GDP.

It's worth noting that the US inflation rate was 2.4% in February, but jumped to 3.3% in March and then to 3.8% in April. The personal consumption expenditures index favoured by the Fed shows headline inflation rising from 3.5% in March to 3.8% in April. The US inflation rate is now above the Fed's 2% target.

The US National Economic Council director, Kevin Hassett, highlighted real (after inflation) wages at the weekend to claim that positive news about the economy was being ignored. However, consumer spending has slowed, and the savings rate has plummeted. The US savings rate, which has averaged around 7.5% to 8% this century, fell to a post-pandemic low of 2.6% in April. The combination of a shrinking savings rate and plummeting consumer and business confidence doesn't augur well for the economy.

Asia has been hardest hit by the oil price shock, as it is the most dependent on the 20% of the world's oil that used to flow through the Strait of Hormuz. Europe and Japan, and other energy import-dependent economies, like Australia, are also suffering from the higher prices. The US, on the other hand, is the world's largest oil exporter, and benefits from the higher oil and gas prices and the blockage of Middle Eastern supply. However, its consumers are running down their savings as their real incomes fall.

The US inflation rate continues to rise, and is becoming embedded in US supply chains and in inflation expectations. The personal consumption expenditures index shows headline inflation rising from 3.5% in March to 3.8% in April. The US Federal Reserve Board is facing a tough decision as inflation continues to rise.

In France, inflation hit a two-year high of 2.8% last month even as the economy is contracting. Italy and Spain are also experiencing rising inflation rates. The European Central Bank is expected to raise its policy rate at least once before the end of the year. In China, manufacturing activity slowed last month and consumer spending decelerated to its lowest levels in four years.

Oil prices have fallen back from their post-attack highs, but the full effect of the war on oil, gasoline, and diesel prices has yet to be reflected in the data. Even if the war were to end this week, global oil inventories have been depleted, and it will take months to restore stocks to their former levels. The elevated cost of transport fuels will continue to trickle through supply chains and into end prices and inflation rates.

The average price for gasoline in the US is now about 37.5% higher than a year ago, and the average diesel price is 55% higher. Consumer prices were already rising due to Donald Trump's tariffs on everyone and almost everything.

Key Facts

The US inflation rate has jumped to 3.8% in April. The average price for gasoline in the US is now about 37.5% higher than a year ago. The average diesel price is 55% higher than a year ago. The US Federal Reserve Board is facing a tough decision. The European Central Bank is expected to raise its policy rate at least once before the end of the year. China's manufacturing activity slowed last month.

The US and other oil import-dependent economies will be watching the oil market closely as tensions between the US and Iran continue.