The US consumer price index (CPI) for April came at a three-year high of 3.8%, fanning speculations that the US Federal Reserve could bite the bullet and raise interest rates in the near future.
US inflation has been rising for the last two consecutive months. In March, inflation rose to 3.3% year-on-year (YoY) after staying at 2.4% in January and February each. April’s CPI at 3.8% is the highest since May 2023, when the US CPI was 4%.
The bad thing about inflation is that it may rise further, thanks to elevated crude oil prices due to the Middle East conflict.
Before the geopolitical conflict escalated, US inflation was broadly on track to moderate. The recent surge in crude oil prices disrupted that trend by pushing up gasoline costs.
Is a US Fed rate hike coming?
In its last policy meeting in April, the Federal Open Market Committee () kept benchmark interest rates unchanged at 3.5%–3.75% for the third consecutive policy.
Fed Chair Jerome Powell, however, underscored the increased risk of inflation from the recent jump in global energy prices.
The central bank has been struggling to bring inflation below its 2% target level. US inflation has been above the Fed’s 2% target since February 2021, as per investing.com.
Most economists rule out the possibility of any rate reduction in the calendar year 2027, given the volatile commodity prices and US President Donald Trump’s tariff policies.
Debopam Chaudhuri, Chief Economist at Piramal Finance, highlighted that key inflation drivers such as gasoline prices have been rising continuously for the last two months, while grocery prices have hit their highest levels in nearly four years. Under these circumstances, the Fed is unlikely to ease monetary policy.
“The immediate impact of this sharp rise in inflation is that it effectively rules out any near-term possibility of a rate cut. Despite a new Fed governor joining the board from May onward, it does not make economic sense for the Federal Reserve to begin cutting rates when inflation remains this elevated,” said Chaudhuri.
However, it is still too early to make a definitive call on rate hikes either.
“US bond yields have already risen sharply, which has effectively acted like a ‘pseudo rate hike’ by tightening financial conditions. Moreover, there are important political and geopolitical considerations at play. There is a growing belief that once the ongoing conflict subsides, crude oil prices could decline quickly. Since elevated oil prices have been a major contributor to inflationary pressure in the US, a fall in crude could ease inflation faster than expected,” Chaudhuri added.
While rate hikes cannot be completely ruled out, the more likely scenario is a prolonged pause in interest rates for the remainder of the calendar year.
Madhavi Arora, Chief Economist for Emkay Global Financial Services, said globally, fears of inflation are beginning to linger, and that could push policymakers across major economies to adopt a more hawkish stance than they currently have.
“Advanced economies, particularly the US, tend to follow a more textbook-driven monetary policy approach. Therefore, the possibility of tighter monetary policy cannot be ruled out,” said Arora.
She, however, was quick to add that headline inflation alone is not necessarily the biggest concern for central banks.
“What they are closely watching is the trajectory of oil prices. The duration for which crude oil prices remain elevated will be a key variable influencing policy decisions across the world. If oil prices continue to stay high for a prolonged period, central banks may have to maintain a hawkish stance for longer than expected,” Arora said.
According to Manoranjan Sharma, Chief Economist at Infomerics Ratings, principally, the Fed can still raise rates if inflation continues to exceed its target, since its primary mandate is price stability.
However, Sharma highlighted that the US economy faces slower growth, high public debt, and vulnerable banking and commercial real estate sectors. Additional rate hikes could weaken employment, increase recession risks, and raise debt-servicing costs for households and firms.
“The Fed must balance inflation control against macroeconomic stability. If inflation expectations become entrenched, policymakers may choose another limited hike or delay anticipated rate cuts. However, aggressive tightening may be away unless inflation rises substantially further,” Sharma said.
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