A slowing labor market was the Federal Reserve's main focus in mid- to late 2025. Attention has shifted to inflation in 2026 as energy prices spike amid the ongoing conflict in the Middle East.
Since late February, when the war between the U.S., Israel and Iran began, oil prices have spiked to their highest level in four years and gas prices have jumped above $4.50 per gallon.
"No matter how long the Iran war goes on, the economy is bound to suffer from it," write David Payne and Matthew Housiaux of The Kiplinger Letter. "How much and how severely depends on just how long the conflict continues to crimp key energy exports."
And it's already taking its toll on consumers' purchasing power. According to the Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) rose 0.6% from March to April and was 3.8% higher year over year, the highest annual increase since May 2023. In March, CPI was 0.9% higher month over month and up 3.3% year over year.
Energy costs had the biggest impact on the April CPI report. "The index for energy rose 3.8 percent in April, accounting for over forty percent of the monthly all items increase," wrote the BLS. Compared to the year-ago period, the energy index was up 17.8% and the gasoline index was 28.4% higher.
Food costs were also higher in April, as were those for household furnishings, airfares, personal care and clothing. The shelter index was higher, too, rising 0.6% month over month after "the BLS introduced a methodological fix to an issue caused by the federal government shutdown in late 2025," says Matt Colyar of Moody's Analytics.
"If it weren't for an unusually mild reading in health care costs, the April results would have been worse," says Kiplinger's Payne. "There will be a similar rise in energy costs for May, though shelter will return to its normal increase."
Economists were calling for headline inflation to be up 0.6% from March to April and 3.7% from the year prior.
Higher inflation will make the Federal Reserve more hesitant to lower interest rates — especially amid signs the labor market is stabilizing. According to CME Group FedWatch, futures traders don't expect any rate cuts at all in 2026. Earlier this year, betting odds were for at least one quarter-point cut.
What is the CPI?
"CPI is a measure of the average price of that basket of goods and services over time," writes Kiplinger contributor Coryanne Hicks. "The specific goods and services within the CPI basket are based on information around 24,000 families and individuals give the U.S. Bureau of Labor Statistics on what they buy."
The two primary measures of CPI are headline, which is the total inflation rate experienced by households, and core CPI, which excludes volatile food and energy prices.
Core CPI accelerated in April, rising 0.4% month over month and 2.8% year over year vs March's readings of 0.2% and 2.6%.
Economists expected core CPI to be up 0.3% on a monthly basis and 2.7% higher year over year.
So what does Wall Street think about the April CPI report? Here, we look at some of what economists, strategists and other experts have to say about the results and what they could mean for the Fed and investors going forward.
What Wall Street expected from the April CPI report
"Inflation is getting sticky and it's getting structural. Today’s report brings an unwelcome increase in services and shelter costs. Combined with the ongoing pressures from energy, this puts Kevin Warsh in a tough spot as he’s joining the Fed. Price pressures are compounding and driving core inflation higher." - David Russell, Global Head of Market Strategy at TradeStation
"Tuesday's CPI marks the second consecutive reading above 3%, suggesting that inflation is roaring back, largely driven by stubbornly high oil prices, which will dominate the inflation story for the rest of the year as the conflict continues to unfold in the Middle East. While this inflation is driven by oil prices and is not structural, it doesn't change the fact that consumers are paying higher prices, and as a result, we expect the Federal Reserve to be on hold through the summer on interest rates. More time and data are needed to assess future data and determine whether the Iran conflict and tariffs continue to pressure consumer prices." - Skyler Weinand, Chief Investment Officer at Regan Capital
"Fed fund futures markets are now pricing the chance of a rate hike at a better than a coin flip in March 2027. While rate hikes are possible should inflationary pressures continue to build, the potential for de-escalation of the conflict in the Middle East and muted strength in the labor market should keep the Fed on hold for the time being, with cuts still more likely than hikes in 2027 in our view." - Josh Jamner, Senior Investment Strategy Analyst at ClearBridge Investments
"For the Fed, with two successively strong employment reports, it should be increasingly turning its gaze away from labor being a problem (which in our view is more of a supply issue than a demand one) toward inflation as the problem. Inflation was already broadly accelerating before the closing of the Strait of Hormuz, and this recent supply shock just exacerbates that underlying trend. New Fed Chair Kevin Warsh will certainly have a harder time framing this case for rate cuts in this environment." - Richard de Chazal, Macro Analyst at William Blair
"Unsurprisingly, energy drove a big increase in the headline rate. The Fed should view these inflation increases as transitory unless the administration responds with subsidies financed through increased deficit spending. President Donald Trump appeared to take a first step in this direction yesterday by promising to suspend federal gas taxes." - Stephen Coltman, Head of Macro at 21shares
"The firm April CPI print showed broad-based inflation across the economy in both headline and core measures, with elevated oil prices and tariff pass-through impacts evident. The Fed will get one more inflation print ahead of their June meeting, but with the strong trend in the jobs data, the balance of risks will likely force them to hold rates. However, prolonged stubborn inflation would increase the need for policy rate hikes and add pressure on a market already navigating geopolitical uncertainty and volatility." - Ryan Weldon, Investment Director and Portfolio Manager at IFM Investors
