It’s Not Just High Gas Prices – Inflation Is Now Spreading Through the American Economy
Yves here. Although this article makes some useful observations, it also serves as another reminder of the distorted view many commentators and commentators have regarding the immediate shock of the Strait of Hormuz. Too many still see it as an energy price shock. First, as asset manager Jeff Currie emphasized, oil and gas may be less important sources of energy relative to GDP than they were in the 1970s, but their overall importance is significant because of how many other petroleum-based products are important to the economy. We won’t see the full impact on food costs kick in until harvest time. And even then, as with oil, there are large grain reserves, so that will offset the end of that supply loss.
It is also revealing, and in a bad way, to see how much attention this article gives to the Fed, which can deal with supply shocks only by killing cold economic stones with rate hikes, and not by the action of the Government and the province to try to make businesses reduce waste and inefficiency and to ensure that the use of the limited output should be the most important. Note, they cannot solve such a big problem, but they can reduce the damage.
By D. Brian Blank, Associate Professor of Finance, Mississippi State University, and Brandy Hadley, Associate Professor of Finance and Distinguished Expert in Applied Investments, Appalachian State University. Originally published on The Conversation
Americans don’t need a press release to know that inflation is rising. Gasoline is above $4 per liter amid ongoing conflicts in the Middle East and the closure of the Strait of Hormuz, as well as the release of key price data on May 28, 2026, underscoring why policymakers are concerned that these pressures could spread to the wider economy.
The report provided a mixed but still uncomfortable picture. The month-on-month increase was softer than expected, but the year-on-year change still points to concerns: a 3.8% jump from the previous year, the fastest pace since 2021, and a variable index excluding food and energy that rose 3.3%.
This increase suggests that inflation is not limited to fuel. Housing, utilities and leisure costs are also keeping underlying inflation high, even as other data points to a slowing economy and weak wage growth.
As economists and investment practitioners who study how businesses make decisions amid uncertainty, we have watched this conflict build. In our 2026 economic outlook, we warned that fears of a recession could continue along with rising prices. New inflation data now suggests the challenge may be deeper and longer-lasting than many expect.
Are All Prices Going Up?
The latest inflation data comes from the Personal Consumption Expenditures Price Index, or PCE title, which is maintained and released by the Commerce Department’s Bureau of Economic Analysis. Headline PCE was already heating up, rising to 3.5% annually in March 2026, up from 2.8% in February. But the Federal Reserve’s more important metric is the core PCE, which excludes the volatile categories of food and energy. Core PCE is important because it gives policymakers a clear read on inflationary pressures and is generally considered a better forecast of where inflation is headed, the Fed’s main concern. That has been on the rise this year as well.
The key question is not just whether fuel prices are rising, but whether those higher electricity costs are spreading across the economy.
That is why energy costs are both a measure of current inflation and a signal of future price increases. They come directly from inflation data like PCE but also affect shipping, airline costs, food production, utilities, packaging, business profit margins and consumer sentiment. A one-time conflict does not create permanent inflation. But the risk increases when those higher costs are passed on to the wider economy and people begin to expect inflation to stay high. For example, if workers believe that costs will be higher in general, they may demand higher wages, which could fuel inflation even more.
There is some evidence that the inflationary impact of energy prices is spreading. April’s report on the Consumer Price Index – another gauge of inflation – showed a 3.8% jump, the fastest in three years, with energy prices up 18% and spending on airplanes more than 20%, while grocery prices posted their biggest monthly gain since 2022. Tax-sensitive categories such as clothing and household goods are also on the rise.
And it’s these costs, not primary PCE, that families experience every day. Americans buy gas, pay utility bills, buy groceries and begin to change the way they spend money in response to these pressures. That’s why the Fed is watching to see how energy prices affect other measures of inflation.
What should the Fed do?
Kevin Warsh was recently sworn in as the central bank’s new chairman, which means the Fed’s next policy-making committee meeting on June 16-17, 2026, will be his first in that role. He will face an unusual amount of disagreement among committee members and scrutiny of his positions given his changes on inflation and Fed policy since being appointed by President Donald Trump. The president has pressured the Fed to cut rates, while Warsh recently downplayed the importance and accuracy of the PCE gauge.
The Fed’s tool to deal with inflation is to raise interest rates, but it’s not always straightforward. The Fed doesn’t just raise interest rates as a direct response to inflation. If the increase in energy prices looks temporary and inflation expectations remain “firm” – that is, stable among consumers – the Fed may hold rates or cut them as consumers continue to demand money back. But it may have to keep rates high for longer or consider further tightening if those conditions do not hold and inflation continues to rise.
This creates the problem of the Fed’s “dual mandate” to control inflation while supporting economic growth. High electricity prices increase, but they also reduce household consumption and slow growth. In that sense, higher energy prices can act as a tax on consumers: People spend more on driving, heating and cooling their homes, and receiving goods, leaving less money for restaurants, tourism, retail and other purchases.
That’s why the Fed doesn’t have an easy answer. If it raises interest rates to fight inflation, it will not solve the country’s conflicts and increase the global oil supply. But it can reduce demand and slow down inflation.
Indeed, according to notes from the Fed’s most recent policy committee meeting in April, many officials are increasingly concerned that persistent inflation may require more rate hikes. Although the Fed decided to hold rates steady at 3.50% to 3.75% during that period, committee members noted that inflation remained high, “in part reflecting the recent increase in global energy prices.”
Another factor: Long-term yields on Treasury bonds, which indicate what investors need to buy US debt, have reached their highest levels since 2007. That could be a sign that markets are expecting higher rates or more uncertainty – and it’s important because yields influence mortgage rates, business borrowing costs and the value of retirement portfolios, to name a few examples. In other words, inflation concerns do not have to wait for another Fed rate hike to affect the economy. If the markets believe that inflation will remain high, the cost of borrowing may increase on its own.
What to Watch at the June Fed Meeting
The change in leadership at the Fed makes this period particularly noteworthy. Warsh’s first big challenge may not be whether to raise or cut rates quickly, but how to explain what the Fed is looking at. Will you emphasize core inflation, headline inflation, other measures of inflation, consumer expectations, financial conditions or signs of slowing demand? This is very important, as some of these gauges are close to 2% and rising slowly while others are rising very quickly away from the Fed’s 2% target.
Artificial intelligence adds another problem. AI-related investments may help hold growth as households feel squeezed by higher electricity and grocery prices. That creates a disparate economy: Consumers struggle with higher rates and borrowing costs, but AI-related investments support markets, infrastructure spending and business prospects. On the other hand, Warsh says AI will also help lower rates, allowing the Fed to lower rates faster.
All of this makes the inflation outlook difficult to read. Slowing consumer demand and wage growth call for caution, while rising inflation expectations and businesses passing on higher costs to consumers and the broader economy argue against higher rates.
Ultimately, the key question for the Fed is not just whether inflation is rising, but whether energy prices are reopening to fight inflation at the exact time it is trying to prove that price stability can still be achieved. Warsh’s first months as chairman will test whether the Fed can maintain inflationary credibility while avoiding unnecessary damage to an already strained consumer economy.
