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US inflation hit its highest level since May 2023.
On a monthly basis, CPI rose 0.6%, down from 0.9% in March and matched the market estimate.
Core CPI, which excludes food and energy and is considered a better gauge of inflation trends, also rose in April, but not as dramatically as headline CPI. The core rate climbed to 2.8% year-on-year, up from 2.6% in April and above the market estimate of 2.7%. Monthly, core CPI rose 0.4%, up from 0.2% in January and higher than the market estimate of 0.3%.
Energy prices continue to soar due to the oil shock triggered by the war in Iran. Energy prices jumped 17.9% year-on-year, the largest increase since September 2022. What is even more alarming for US consumers, gasoline prices have surged 28.4% year-on-year. The silver lining is that the energy price spike eased in April compared to March (3.8% vs. 10.9%), which resulted in a drop in the monthly CPI reading,
Unsurprisingly, the spike in energy prices is having a negative effect on US households – real earnings dropped by 0.5% over the month and were down 0.3% over the year, while the University of Michigan consumer sentiment index dropped to a record low of 48.2 in May.
Implications for the US Dollar
The Iran war has dragged on since February and shows no signs of ending anytime soon. Oil prices are above $100 a barrel, and if risk appetite weakens further, the safe-haven dollar should benefit. Another key factor is the Federal Reserve, which won’t be able to cut interest rates if inflation continues to moving higher and may have to consider rate hikes if inflation worsens.
Conversely, if the Iran conflict is resolved, oil prices would fall, risk appetite would likely jump and US inflation could ease, enabling the Fed to lower rates, which make the US currency less attractive to investors.
US Dollar Gains Ground, Stock Market Mixed
The US dollar climbed against the major currencies on Tuesday, on higher market expectations that the Fed could raise rates by the end of the year. GBP/USD was down 0.51%, closing at 1.3541 and EUR/USD fell 0.36%, closing at 1.1719.
The US stock market was mixed on Tuesday.
The Nasdaq 100 Index declined by 185.92 points (0.71%) and closed at 26,088.20.
The S&P 500 Index closed the day with small losses of 11.8 points (0.16%) at 7400.96.
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