The war in Iran is driving a sharp increase in inflation, as surging gasoline prices ripple through the American economy and stir uncomfortable echoes of an earlier era when energy shocks reshaped daily life for millions of families.
The Labor Department’s consumer price index rose at a 3.8 percent annual pace in the year ending in April, up from 3.3 percent in March and 2.4 percent in February.
Higher energy prices accounted for much of the gain in April of 0.9 percent, compared to March.
The increase marks the steepest year-over-year rise since September 2023, and the second consecutive month in which the conflict in the Middle East has measurably pushed prices higher for American consumers.
For economists who study inflation history, the current moment carries an unsettling resemblance to a period most hoped would not be repeated.
In a recent analysis, a pair of economists drew a parallel between today’s inflation dynamics and those of the late 1970s. The Iranian Revolution in the ’70s helped ignite a second and more severe wave of inflation after a first surge in costs of global oil supplies had seemingly subsided.
“The Great Inflation was not the initial surge,” wrote University of Texas at Austin economist Olivier Coibion and Yuriy Gorodnichenko, an economist at the University of California at Berkeley. “It was the failure to prevent the second one.”
Inflation rose rapidly in 2021 and 2022, then declined over the subsequent years. When plotted alongside the 1970s experience, the pattern in the first phase is difficult to dismiss: a sharp increase followed by a partial reversal, with inflation settling above its pre-surge level rather than returning to it. Now, with a new energy shock emanating from the Middle East, Coibion and Gorodnichenko warn the second wave may be beginning.
A big reason for that revolves around gasoline prices, which are among the most powerful drivers of inflation expectations, with the relationship between gas prices and what consumers anticipate for future inflation close and consistent across decades.
When gas prices rise sharply, inflation expectations follow almost immediately. With expectations already elevated above pre-pandemic levels, a sustained rise in energy prices could push them higher still, prompting more aggressive wage demands and price increases across the broader economy.
Gorodnichenko said inflation expectations remain elevated, to the point where many households and businesses now expect prices to rise faster than interest rates, according to recent surveys. That dynamic can pour fuel on inflation rather than douse it — making it costly, he warned, for the Federal Reserve to hold off on raising interest rates.
“The longer they sit on their hands now, the bigger this problem is going to be,” he said.
There are other signs of rising prices. State Street’s PriceStats index, which tracks daily prices of millions of consumer products sold by online retailers, rose 0.9 percent in April on a non-seasonally adjusted basis. That marked the third-largest single-month increase in the index’s history, going back to 2008.
The index put the annual inflation rate at 4.5 percent as of mid-April, with the bulk of the pressure concentrated in vehicle fuel, which PriceStats estimated rose roughly 32 percent on an annual basis.
“The only small comfort is that, for now, the dramatic moves in inflation are largely limited to fuel prices,” Michael Metcalfe, head of macro strategy at State Street Markets, said in the firm’s news release. He added that food, household equipment and health prices showed relatively normal seasonal increases, though gains in apparel and electronics bear watching.
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