What Happens When Gas Prices Jump 50% and Inflation Won't Quit

Gas prices just shot up over 50% since late February when the US-Iran conflict started, now sitting above $4.50 a gallon on average. Next week's consumer price index report is expected to show a sharp 0.6% monthly increase for April, which would be the second straight month of accelerating inflation after March posted the biggest jump since 2022.

The timing matters because consumer sentiment just hit a fresh record low in the University of Michigan survey, with people citing erosion of household finances and deteriorating buying conditions. When energy prices spike this hard, they don't stay contained. Businesses pass those costs through to other goods and services, including airfares. Even core CPI, which strips out food and energy, is projected to accelerate slightly.

This is the kind of environment where Fed policy stays on hold and traders need to watch the data, not guess where it's going.

The Bureau of Labor Statistics releases the April CPI report on Tuesday. Economists surveyed by Bloomberg see a 0.6% headline increase, driven heavily by fuel costs. Core CPI, the measure the Fed watches more closely, is expected to tick up as well.

Producer prices are also projected to rise 0.5% in April when that report drops on Wednesday, and again the core measure probably accelerated from March. That's wholesale inflation, which feeds into consumer prices with a lag. So if PPI is running hot, retail prices are likely to follow.

Retail sales data on Thursday will show whether consumers are actually pulling back or just complaining. Excluding gas stations and car dealers, sales are forecast to rise 0.4% in April, down slightly from 0.6% gains in February and March. The tricky part is that retail sales aren't adjusted for inflation, so some of that growth is just higher prices, not more stuff being bought.

Kraft Heinz and McDonald's have both flagged concerns about budget-constrained shoppers in recent earnings calls. If you're watching consumer discretionary stocks, this is the kind of backdrop where companies start missing revenue estimates even if unit volumes hold steady, because people trade down or skip purchases entirely.

The combination of persistent inflation and only modest economic slowing doesn't create urgency for the Federal Reserve to ease policy. Another firm core CPI print could keep the Fed in a hawkish stance for a while, meaning rates stay elevated and the bond market prices in fewer cuts than it did a month ago.

That's a headwind for equities, especially growth stocks that are valued on distant cash flows. When the discount rate stays high, those valuations compress. It's also a headwind for housing, which is why existing home sales on Monday will be worth watching. Higher mortgage rates and sustained inflation are a rough mix for affordability.

If you're not familiar with how central banks respond to inflation shocks, the short version is they prioritize price stability over growth when inflation is above target and consumer expectations start drifting higher. The University of Michigan sentiment survey includes inflation expectations, and those numbers have been creeping up. That's what keeps central bankers awake at night.

This isn't just a US story. China releases April CPI data on Monday, and consumer inflation is expected to cool to 0.8% while factory-gate prices accelerate to 1.8%, the fastest since August 2022. That's energy prices showing up in wholesale costs.

India, Brazil, Israel, and Russia all have inflation reports due next week. Brazil's benchmark inflation index is likely to jump over 4.4% in April from 3.81% in February. Peru hit 4.01% in April, above target, and their central bank meets Thursday with rate hikes back on the table for the first time since early 2023.

The common thread is energy. When oil and gas prices spike because of geopolitical risk, it doesn't stay isolated. It shows up in transportation costs, manufacturing inputs, electricity bills, and eventually consumer goods. The US-Iran conflict is still rattling markets, and as long as that's unresolved, energy prices stay elevated and inflation pressures stay sticky.

The April CPI report on Tuesday is the big one. If core CPI comes in hotter than expected, expect the bond market to reprice rate cut expectations lower and equities to sell off, especially rate-sensitive sectors like tech and utilities. If it comes in cooler, you'll see the opposite reaction, but given the gas price surge, a downside surprise seems unlikely.

Retail sales on Thursday will clarify whether consumers are still spending or starting to crack. If ex-autos, ex-gas sales come in below 0.4%, that's a sign spending momentum is fading. Combined with weak sentiment data, that could set up a scenario where the economy slows more than the Fed expects, which eventually forces rate cuts. But we're not there yet.

Industrial production on Friday rounds out the week. Manufacturing has been mixed, and if production falls, that's another sign the economy is cooling. But inflation has to cool first before the Fed moves, and right now inflation is the story.

For traders running mechanical setups, this is an environment where false breakouts are common because news flow is driving volatility more than underlying structure. The behavioral gap between analysis and execution widens when macro uncertainty is high. If your system says wait, wait. If it says the setup is there, take it, but size appropriately because headlines can whipsaw price action fast.

Energy prices could reverse if the Iran situation de-escalates. That would take pressure off headline CPI pretty quickly, though core inflation tends to be stickier because wage pressures and rent increases don't turn on a dime.

Consumer spending could collapse faster than expected if sentiment stays this low. People can only tap savings and credit for so long before they pull back, and if that happens, demand destruction brings inflation down the hard way through a recession. The Fed would cut rates in that scenario, but it's not a good outcome for risk assets in the short term.

The other wild card is fiscal policy. If the government steps in with relief measures to offset higher gas prices, that props up demand and keeps inflation elevated longer. It's politically popular, but economically it just extends the problem.

Right now, the path of least resistance is sideways and choppy until inflation data clearly turns lower or the economy clearly breaks. Neither has happened yet.