US Markets React Sharply To Rising Inflation Concerns

American inflation accelerates again. In April, the price increase reached 3.8 % year-on-year, its highest level in three years. The surge in energy costs, fueled by tensions around Iran and disruptions in the Strait of Hormuz, is beginning to weigh on the American economy. This rise now complicates the outlook for Federal Reserve rate cuts and revives tensions in the financial markets.

The Iranian oil shock rekindles American inflation

The Bureau of Labor Statistics specifies that nearly half of the inflation increase observed in April comes from energy. The effective closure of the Strait of Hormuz, a strategic axis of global oil trade, quickly caused a surge in crude oil prices passed on to American consumers.

Several indicators testify to this growing tension on the American economy :

• American inflation at 3.8 % in April compared to 3.3 % in March ;
• The average price of a gallon of gasoline at $4.50, a peak since July 2022 ;
• A 20.7 % year-on-year increase in airfares ;
• Rising housing and food costs ;
• A slight drop in new car prices.

This deterioration occurs in a particularly sensitive political climate for Donald Trump. The American president described this price rise as a short-term phenomenon, stating that Americans would understand that his priority remains to prevent Iran from obtaining nuclear weapons.

Financial analysts are much more cautious. Isaac Stell, investment manager at Wealth Club, estimates that further rate hikes “remain clearly possible”. Danni Hewson, head of financial analysis at AJ Bell, notes that “Americans are extremely sensitive to gasoline prices”.

Markets now fear a freeze on rate cuts

This inflationary surge greatly reduces the chances of a Federal Reserve monetary easing this year. Investors were still anticipating several rate cuts to support the American economy. Now, the scenario of a prolonged holding of high rates is gaining ground, with direct consequences on financial markets. Wall Street immediately reacted to the release of the figures: the S&P 500 opened down 0.6 %, while the Dow Jones fell 0.7 %.

The report published on Tuesday also marks a turning point for American households. For the first time in three years, wage growth falls below inflation. Incomes rose by 3.6% year-on-year, compared to 3.8 % for consumer prices.

This inversion fuels the risk of a slowdown in purchasing power ahead of the midterm elections. It also comes a few days before Kevin Warsh takes over as head of the Fed, replacing Jerome Powell. According to Isaac Stell, the future chairman of the central bank will have “very limited room for maneuver” in an environment where each monetary decision could now have major political and financial repercussions.

In this climate of monetary and geopolitical uncertainty, bitcoin is also regaining its status as an alternative asset closely watched by investors seeking protection against the return of inflation.

The return of inflation fueled by energy highlights how global economic balances remain vulnerable to geopolitical tensions. After several months of optimism about a possible Fed monetary pivot, markets must now reckon with a new risk: that of a lasting oil shock capable of delaying the return to a more accommodative monetary policy.