US Inflation Rises To 3.8% Driven By Soaring Energy Prices

• US headline inflation jumped to its highest in three years at 3.8%, primarily triggered by surging high energy prices.
• The data will likely cause the Fed to hold off on any interest rate adjustments.
• Bitcoin was unfazed by the latest CPI data, maintaining its footing above $80K.

Americans continue to bear the brunt of the tension in the Middle East. On Tuesday, the US Bureau of Labor Statistics (BLS) reported that the country is experiencing the highest inflation rate since 2023.

US Inflation Peaks in Three-Year Chart

According to the BLS, core inflation (excluding volatile food and energy prices) rose 0.4% month-over-month to 2.8%. However, headline inflation soared 0.6% month-over-month to 3.8%.

The latter was mainly driven by spiking fuel oil prices, as the US and Iran have continued to fail to reach a compromise in the ongoing conflict. While food prices saw an uptick to 3.2%, energy costs jumped 17.9%. Within the energy sector, fuel oil contributed the highest gain at 54.3%, followed by 29.2% from energy commodities, 28.4% from all gasoline types, and 6% on electricity costs.

Excluding the food and energy categories, transportation services and apparel surged to 4.3% and 4.2%, respectively. Meanwhile, only the costs of used cars and trucks and medical care commodities displayed significant declines in the list, with the former accounting for -2.7% and the latter for -0.5%.

Medical care services increased to 3.2%, though, indicating that the rising cost of labor and administrative overhead in the healthcare sector is now getting priced into its services.

What Does This Mean for the Fed?

Core inflation remains well-above the Federal Reserve’s soft landing target at 2%. On the other hand, non-farm payroll employment improved by 115,000 in April, amid the unemployment rate stagnating at 4.3%

The data pose a dilemma for the Fed, as modest job gains signal a cooling labor market. The situation typically calls for lower interest rates to encourage companies to invest in machinery and personnel.

Core inflation may be close to the Fed’s ideal pace, but factoring the headline inflation in the equation complicates things. A dovish policy at such a rate could risk fastening the high price expectations, which could lead to stagflation. The scenario could stall economic growth as prices continue climbing. With energy prices already as bad as they come, any move to slash interest rates from the prevailing 3.5%-3.7% could trigger a catastrophic feedback loop.

Raising interest rates too high does not bode well for the economy, either. It could deepen the credit crunch for small businesses and households already struggling with the current state of the economy.

Analysts are betting the Fed will hold rates until summer amid macro uncertainty.

Bitcoin Performance

Despite major stock indices trading in the red at Tuesday’s open, Bitcoin has maintained its foothold around $80K. Somehow, Morgan Stanley’s strong performance of its Bitcoin exchange-traded fund (ETF), attracting around $250 million in net inflows in its first month, and the gradual recovery of crypto market sentiment cushioned the impact of the bad US inflation data.

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