Iran war energy shock squeezes U.S. paychecks
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For the first time in three years, American workers' paychecks are lagging behind inflation, a casualty of the Iran war energy shock.
Why it matters: The war's fallout has helped remove the financial cushion that insulated consumers. It comes as a tepid hiring environment has limited workers' ability to switch jobs and earn more pay.
- Workers are now earning less in real terms, a threat to spending that has kept the economy humming.
What they're saying: "American households continue to feel the brunt of surging energy costs, adding to the deluge of inflation they have weathered since the pandemic," James McCann, a senior economist at Edward Jones, wrote in a note.
- "Moreover, with the Strait of Hormuz still effectively shuttered, the risk that we are not past the peak of these price pressures is rising."
Driving the news: The Consumer Price Index rose 3.8% in April from the same period a year ago, surging from the previous month's reading of 3.3% to the highest level since 2023.
- Wages for rank-and-file employees increased 3.6% over the same period, strengthening relative to March but not enough to offset inflation.
- In other words, worker pay fell 0.2% in real terms, the first year-over-year drop since 2023.
Zoom out: April's CPI report shows persistent price pressure in categories most salient for consumer budgets — food and energy — even if Federal Reserve officials tend to look past them.
- Higher energy prices accounted for the bulk of the 0.6% jump in inflation last month, rising nearly 4% after a gain of roughly 11% in March. Compared with the same period a year ago, energy costs are up 18%.
- But food prices also soared in the second full month of the war, after benign readings in March: Both grocery costs and dining out advanced at the quickest monthly pace since the end of last year, before President Trump rolled back tariffs on a slew of food imports.
- Airfares also continued to surge as airlines face higher jet fuel costs, rising almost 3% after a similar gain in March.
The big picture: American households have absorbed a rise of nearly 30% in consumer prices since the pandemic — a cumulative toll that has never fully healed.
- The renewed squeeze is landing on already stretched budgets, with consumer sentiment at record lows.
- The 2022-23 squeeze was driven by supply chain distortions unwinding from the pandemic, when a historically tight labor market gave workers real leverage to job-hop for bigger paychecks.
- But today's pressure is harder to dodge, with an energy shock born from an uncertain war. It's hitting consumers who have fewer opportunities to switch jobs and bargain for more pay.
What to watch: Core inflation — which strips out food and energy — gained a more modest 2.8% over the past year, suggesting that the Iran shock hasn't yet fully bled into broader prices. The Fed will be watching whether that holds.
- Even that core measure likely overstates the price pressures outside of those categories.
- The shelter index, which carries significant weight in core CPI, rose 0.6% in April alone. That reading was distorted by the six-week government shutdown last fall that interrupted normal data collection.
