The US consumer price index (CPI) for April came at a three-year high of 3.8%, fanning speculations that the US Federal Reserve could bite the bullet and raise interest rates in the near future.
US inflation has been rising for the last two consecutive months. In March, inflation rose to 3.3% year-on-year (YoY) after staying at 2.4% in January and February each. April’s CPI at 3.8% is the highest since May 2023, when the US CPI was 4%.
The bad thing about inflation is that it may rise further, thanks to elevated crude oil prices due to the Middle East conflict.
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The US consumer price index (CPI) for April reached a three-year high of 3.8%. This surge is attributed to elevated crude oil prices, exacerbated by the conflict in the Middle East, which has disrupted the trend of moderating inflation and pushed up gasoline costs.
While a rate hike cannot be completely ruled out, the more likely scenario is a prolonged pause in interest rates. Elevated oil prices have driven inflation, but US bond yields have already risen, acting as a ‘pseudo rate hike’. Geopolitical factors and potential declines in oil prices once conflicts subside could ease inflation, making aggressive tightening less probable unless inflation rises substantially further.
The Federal Reserve may delay rate cuts because inflation control is taking priority over growth support. With inflation above the Fed’s 2% target and key drivers like gasoline and grocery prices rising, it does not make economic sense to ease monetary policy. The central bank is closely watching the trajectory of oil prices, and if they remain elevated, a hawkish stance might be maintained longer than expected.
The conflict in the Middle East has led to elevated crude oil prices, which in turn have pushed up gasoline costs and disrupted the trend of moderating inflation in the US. This surge in energy prices is a major contributor to inflationary pressure and influences the Federal Reserve’s decisions, potentially leading to a more hawkish stance or delayed rate cuts.
The immediate impact of the sharp rise in inflation rules out any near-term possibility of a rate cut. While rate hikes are not entirely off the table, a prolonged pause in interest rates for the remainder of the year is the more likely scenario. The Fed must balance inflation control against macroeconomic stability, considering factors like slower growth and high public debt.
Before the geopolitical conflict escalated, US inflation was broadly on track to moderate. The recent surge in crude oil prices disrupted that trend by pushing up gasoline costs.
Is a US Fed rate hike coming?
In its last policy meeting in April, the Federal Open Market Committee (FOMC) kept benchmark interest rates unchanged at 3.5%–3.75% for the third consecutive policy.
Fed Chair Jerome Powell, however, underscored the increased risk of inflation from the recent jump in global energy prices.
The central bank has been struggling to bring inflation below its 2% target level. US inflation has been above the Fed’s 2% target since February 2021, as per investing.com.
Most economists rule out the possibility of any rate reduction in the calendar year 2027, given the volatile commodity prices and US President Donald Trump’s tariff policies.
Debopam Chaudhuri, Chief Economist at Piramal Finance, highlighted that key inflation drivers such as gasoline prices have been rising continuously for the last two months, while grocery prices have hit their highest levels in nearly four years. Under these circumstances, the Fed is unlikely to ease monetary policy.
“The immediate impact of this sharp rise in inflation is that it effectively rules out any near-term possibility of a rate cut. Despite a new Fed governor joining the board from May onward, it does not make economic sense for the Federal Reserve to begin cutting rates when inflation remains this elevated,” said Chaudhuri.
However, it is still too early to make a definitive call on rate hikes either.
“US bond yields have already risen sharply, which has effectively acted like a ‘pseudo rate hike’ by tightening financial conditions. Moreover, there are important political and geopolitical considerations at play. There is a growing belief that once the ongoing conflict subsides, crude oil prices could decline quickly. Since elevated oil prices have been a major contributor to inflationary pressure in the US, a fall in crude could ease inflation faster than expected,” Chaudhuri added.
While rate hikes cannot be completely ruled out, the more likely scenario is a prolonged pause in interest rates for the remainder of the calendar year.
Madhavi Arora, Chief Economist for Emkay Global Financial Services, said globally, fears of inflation are beginning to linger, and that could push policymakers across major economies to adopt a more hawkish stance than they currently have.
“Advanced economies, particularly the US, tend to follow a more textbook-driven monetary policy approach. Therefore, the possibility of tighter monetary policy cannot be ruled out,” said Arora.
She, however, was quick to add that headline inflation alone is not necessarily the biggest concern for central banks.
“What they are closely watching is the trajectory of oil prices. The duration for which crude oil prices remain elevated will be a key variable influencing policy decisions across the world. If oil prices continue to stay high for a prolonged period, central banks may have to maintain a hawkish stance for longer than expected,” Arora said.
According to Manoranjan Sharma, Chief Economist at Infomerics Ratings, principally, the Fed can still raise rates if inflation continues to exceed its target, since its primary mandate is price stability.
However, Sharma highlighted that the US economy faces slower growth, high public debt, and vulnerable banking and commercial real estate sectors. Additional rate hikes could weaken employment, increase recession risks, and raise debt-servicing costs for households and firms.
“The Fed must balance inflation control against macroeconomic stability. If inflation expectations become entrenched, policymakers may choose another limited hike or delay anticipated rate cuts. However, aggressive tightening may be away unless inflation rises substantially further,” Sharma said.
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Disclaimer: This story is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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