War Drives Inflation Higher Again... Prices Outpace Wage Growth for First Time in Three Years

US April CPI Hits 3.8%, Highest in Three Years

Core CPI Exceeds Expectations

Real Wages Turn Negative at -0.3%

In April, the Consumer Price Index (CPI) growth rate in the United States outpaced the average hourly wage increase for Americans for the first time in three years since April 2023. The surge in gasoline prices, a consequence of the war involving Iran, offset the wage gains. As U.S. households face heavier inflationary burdens, it is expected that the Federal Reserve’s interest rate cut plans will be further delayed.

On May 12 (local time), the U.S. Department of Labor announced that the April CPI rose by 3.8% year-on-year. On a month-over-month basis, it increased by 0.6%. These results matched the expert forecasts compiled by Dow Jones.

However, the core CPI, which excludes the more volatile food and energy sectors, rose by 2.8% year-on-year and 0.4% month-over-month, both exceeding market expectations of 2.7% and 0.3% respectively. This suggests that the underlying inflationary trend is more resilient than anticipated.

April’s CPI was driven by energy prices. The energy index jumped 3.8% from the previous month, accounting for over 40% of the total CPI increase. Notably, gasoline prices rose by 5.4% compared to the previous month, and by 11.1% before seasonal adjustment. Year-on-year, gasoline prices surged by 28.4%. The protracted nature of the war involving Iran has pushed up international oil prices, which are now being reflected in consumer prices.

Housing and food prices also remained elevated. The shelter index rose by 0.6% from the previous month. Both rent and owners’ equivalent rent increased by 0.5% each. Food prices climbed by 0.5% compared to the previous month, beef prices soared by 2.7%, and fruit and vegetable prices jumped by 1.8%.

It is noteworthy that the real purchasing power of U.S. households is weakening. According to the Department of Labor, the average hourly wage increase in April was 3.6% year-on-year, below the April CPI growth rate of 3.8%. This is the first time since April 2023 that inflation has outpaced wage growth.

As a result, real hourly earnings, which are adjusted for inflation, declined by 0.3%. This indicates that the wage growth effects that persisted after COVID-19 are now being partially offset by inflation driven by the war in Iran. The Wall Street Journal pointed out that the diminishing impact of wage hikes, together with the increased cost-of-living burden, is one reason why U.S. consumer sentiment has recently dropped to historically low levels.

Thomas Martin, Chief Portfolio Manager at Globalt Investments, said in an interview with CNBC, “The longer the Middle East conflict drags on, the more persistent inflation will become. As gasoline and other prices rise, more and more people will struggle, and consumers will continue to face tough times.”

On a weekly basis, the decline was somewhat limited. As working hours in April increased slightly, the real weekly earnings of private sector workers decreased by only 0.2% year-on-year, and for production and non-supervisory employees, real weekly earnings actually rose by 0.1%.

In the market, the future trajectory of international oil prices is seen as a key variable for the Federal Reserve’s policy. While the headline CPI matched expectations and provided some relief, the core CPI exceeded forecasts, and real wages have turned negative.

Brett Kenwell of eToro commented, “The labor market and overall economy remain stable, but the Federal Reserve’s policy stance is becoming more complicated as inflation rises.”

Skyler Winand of Reagan Capital noted, “Inflation is surging again, primarily due to high oil prices. With the Middle East conflict ongoing, this will be the major factor influencing inflation for the remainder of the year.”