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HOT INFLATION, RISING PRICE HIKE INTENTIONS: TWO-FER TUESDAY HAS THE IRAN WAR WRITTEN ALL OVER IT

Today's economic data is showing the burden of the effects of 10-plus weeks of heightened conflict in the Middle East.

First, investors were provided with a fresh glimpse at the extent to which the ongoing war on Iran, and the resulting energy supply shock, is affecting price growth.

The Labor Department's Consumer Price Index (CPI) USCPI=ECI, which tracks the prices urban consumers pay for a basket of goods and services, grew by 0.6%. That was cooler than March's 0.9% print and in line with consensus.

Year-over-year, CPI posted a 3.8% increase, hotter than analysts expected and half a percentage point higher than the previous reading.

Core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," also landed north of estimates, printing at 0.4% and 2.8% on monthly and annual bases, respectively.

The U.S.-Israeli war on Iran, now in its 11th week, launched crude prices into the stratosphere and stoked worries of inflation. This report provides another taste of the lingering war's inflationary effects.

It's the second take on April inflation, after Friday's cooler-than-expected wage growth data.

"As long as energy prices continue to stay at these levels and move higher, then the chances of energy inflation spreading to other components of the economy increases," Peter Cardillo, chief market economist at Spartan Capital Securities tells Reuters. "And I think that's the greatest fear that we have out there right now."

"Certainly, it means that the new Fed chairman will have his hands tied to the point that (the Fed's) not likely to lower rates anytime this year."

Line-by-line, a 3.8% monthly jump in energy prices, following March's 10.9% surge, prompted a 5.4% surge at the gasoline pump. Housing fuels/utilities and transportation costs increased by 1.4% and 1.3% from the previous month, and the cost of an airline ticket rose by 2.8%. Food prices increased 0.5%.

The cost of shelter and services, two metrics closely watched by the Fed, both rose by 0.6%. Year-over-year, shelter prices have risen by 3.3% and services show annual growth of 3.4%. Both continue to coast well north of core inflation.

"The first order effect from the conflict in the Middle East has been a shock to oil prices, which have translated very quickly to what consumers are paying at the pump," writes Skyler Weinand, chief investment officer at Regan Capital. "But the next frontier to watch is rising input prices for food and materials, and that makes the Federal Reserve's job even tougher because it's difficult to control these prices with interest rates alone."

On Thursday, the Commerce Department's April retail sales report could shed light on the extent to which rising inflation is affecting consumer behavior.

Changing gears, the mood among small business owners in the U.S. remained pessimistic in April, according to the National Federation of Independent Business (NFIB).

NFIB's Optimism Index USOPIN=ECI edged 0.1 point higher to 95.9, remaining below its 52-year average of 98, mostly because of - you guessed it - inflation.

Digging deeper, the Uncertainty Index cooled four points to 88, but remained far above 68, its long-term average.

The employment component ticked lower, and the percentage of respondents expecting business conditions to improve slid seven points to their lowest level since October 2024.

The most vexing issue for small business was poor labor quality, followed by taxes and inflation.

And, sticking with the theme of the day, reports of both actual and planned price increases rose.

"The rise in planned price increases is moderate, but it’s still early days," says Bernard Yaros, lead U.S. economist at Oxford Economics. "Energy price shocks take time to filter through to nonenergy prices, and businesses will absorb some of the energy-driven cost increases to avoid rankling their customer base that is fatigued by several years of stubbornly high inflation."

As a reminder, the NFIB is a politically active membership organization whose PAC skews heavily Republican, according to the Center for Responsive Politics/opensecrets.org.

(Stephen Culp)

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