Global Prices Rise On Iran War Shock As US Inflation Hits Three-Year High: When Will It Stabilise

The US economy is showing signs of strain as inflation climbs to a three-year high and growth slows more than expected. New government data suggests that rising energy costs linked to the Iran war are feeding through into higher prices for American households, while consumer spending power is weakening.

The Commerce Department said the US economy grew at an annual rate of 1.6% in the first quarter of this year, down from an earlier estimate of 2.0%.

At the same time, the Federal Reserve’s preferred inflation measure rose to 3.8% in April, the highest level since 2023. Together, the figures point to an economy under pressure from higher costs and slowing demand.

Energy Shock From Iran War Drives Prices 

A major driver of rising inflation has been energy prices, which surged after the US-Israeli

military strikes on Iran on February 28. The conflict triggered retaliation from Tehran and disruptions across the Middle East, including a sharp slowdown in shipping through the Strait of Hormuz — a key route for around a fifth of global oil and gas supplies.

As global oil flows tightened, fuel prices jumped sharply. In the US, gasoline costs have risen by around 48% since the start of the war, according to the AAA motor club.

In April alone, American consumers spent $28.8 billion more on fuel and related products compared to a year earlier.

This energy shock has not only pushed inflation higher but also weighed on overall economic activity. Higher fuel costs increase transport and production expenses, which then filter through to food, goods and services.

US Consumers Under Pressure

The latest data also shows that American households are beginning to feel the squeeze. Personal incomes fell by 0.1% in April, while inflation-adjusted incomes dropped even further. Although consumer spending rose by 0.5%, much of this increase was driven by higher prices rather than stronger demand.

Economists say this pattern is unsustainable. With savings rates falling to their lowest level in nearly four years, many households are relying on past savings to cover rising costs. At the same time, wage growth is slowing, leaving less room for spending once essential bills are paid.

“Americans are being squeezed financially. Inflation is at a three-year high and personal savings has cratered to one of the lowest levels in the past 20 years,” Heather Long, chief economist at Navy Federal Credit Union, wrote in a note on Thursday. “Many Americans are spending more than the income they have coming in. This is not sustainable, especially for lower-income and middle-class households.”

Analysts further warn that consumer fatigue is setting in. As James Knightley, chief international economist at ING, noted, consumer spending accounts for around 70% of the US economy, meaning any slowdown has wide consequences for growth.

Housing data also points to weakness, with new home sales falling 6.2% in April and mortgage rates remaining high at around 6.5%. Together, these trends suggest broader pressure on household finances.

Inflation Outlook

Core inflation, which excludes food and energy, rose to 3.3%, showing that price pressures are not limited to fuel alone. Officials at the US Federal Reserve have signalled concern that inflation could remain elevated for longer than expected, especially if energy and tariff-related costs continue to rise.

The Fed has kept interest rates unchanged since January and may delay cuts further. Some policymakers have even suggested that rate hikes cannot be ruled out if inflation remains stubborn.

US Treasury Secretary Scott Bessent have downplayed the latest figures, saying they expect prices to fall once geopolitical tensions ease. However, economists remain cautious. The disruption in global oil supply routes, combined with weaker income growth and rising business costs, could keep inflation above the Fed’s 2% target for some time.

(With inputs from agencies)