The U.S. economy added a robust 172,000 jobs in May, a sign that the labor market remained resilient despite a growing energy and inflation crisis triggered by the ongoing war with Iran.

According to the Bureau of Labor Statistics, the unemployment rate remained steady at 4.3%.

While hiring is solid, there’s growing concern about wages lagging the rate of price growth. Average hourly earnings rose 3.4% from a year ago. According to Jennifer Timmerman, an analyst at the Wells Fargo Investment Institute, that’s the lowest since 2021. In April, inflation sharply jumped to a 3.8%, its highest level in three years, due to the surging price of gasoline and the resulting economic ripple effect.

“We believe this foreshadows a loss of momentum in consumer spending (especially discretionary outlays) in the coming months,” she added.

The government will release the May inflation report next week.

Since the United States and Israel launched the war with Iran on Feb. 28, the average price of retail gasoline has soared more than 40% as the price of U.S. crude oil increased more than 35%.

Given the relative strength of the jobs market, it’s looking more likely that the Federal Reserve will raise interest rates this year in a bid to put a lid on inflation.

After the report, U.S. government bond yields surged and stocks sold off. Fed rate futures also quickly indicated that traders are now projecting a more than 60% chance of a rate hike in October and a more than 98% chance by December’s Fed meeting.

The Fed will make its next interest rate decision June 17, during Kevin Warsh’s first meeting as chair. President Donald Trump, who appointed Warsh, has been pushing for lower rates.

“If Chair Warsh pushes for cuts at his first meeting, he will be pushing against the evidence,” said Seema Shah, chief global strategist at Principal Asset Management.

An economic divide

The White House was quick to cast the otherwise strong report as a victory.

“I think that basically what we’re seeing is an enormous amount of positive momentum in hiring,” Kevin Hassett, the director of the National Economic Council, said on CNBC Friday morning.

Asked about wage growth tracking below inflation, Hassett deflected concerns on Bloomberg Television, saying that “real wages are going up on average about $3,000 since President Trump took office.”

Once again, some of the largest contributors to job growth in May were the education and healthcare sectors. They have largely driven labor market gains over the last year.

There was also a surprise gain of jobs in the leisure and hospitality industry. May’s increase of 70,000 jobs was “well above the average monthly gain of 14,000 over the prior 12 months,” BLS said.

PNC Bank chief economist Gus Faucher noted that “the breadth of job growth has picked up in 2026.” He added that “in 2025 there were net job losses in all industries outside of healthcare, but in 2026 those industries are seeing net job growth.”

Local government also saw job gains.

Some of the weakest sectors in May included financial services, which shed 22,000 jobs, and the transportation/warehousing industry. That sector is “down by 92,000 [jobs]since reaching a peak in February 2025,” the agency said.

There was good news in revised numbers for previous months, too. BLS also said that employment in March and April was revised up by 93,000. Employment in March was revised up 29,000 and April was revised up by 64,000 roles.

Fed officials have signaled their wariness about the trajectory of the economy in recent weeks.

“If recent data trends continue, it may soon be appropriate for policy to act to address the growing risks of persistently elevated inflation,” Beth Hammack, president of the Federal Reserve Bank of Cleveland, said Tuesday. Hammack is a voter on the Fed’s interest rate-setting committee. She added that “monetary policy may not be sufficiently restrictive to bring inflation down to 2%.”

But more troubling for economists is the 55% rise in the price of diesel fuel, which is used in shipping, farming, transportation and construction. It can quickly raise costs for consumers as the higher price is passed down across a number of industries.

Wholesale inflation — what businesses pay other businesses for goods and services — surged to 6% in April, according to BLS data released May 13. That was sharply higher than the 4.3% in March.

“If we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments, at greater cost,” Hammack added.

Fed governor Lisa Cook, likewise, said last week in a speech: “I want to be clear about my risk assessment: The risks remain tilted toward higher inflation.”

Cook also said trillions of dollars of artificial intelligence investments could cause another price shock. Over the course of the last year, the prices of data center equipment, computer memory and chips have soared.

Economists have marveled this year at how resilient the American consumer has been, maintaining spending even as prices rise for necessities from gasoline to groceries.

In April personal spending was flat after a 0.5% increase a month earlier. But dig deeper into the numbers and it turns out this spending is being supported by consumers drawing down their savings – a trend that could put a dent in spending if prices continue their ascent.

The flat spending in April was accompanied by a decline in disposable income, while the savings rate (personal savings as a percentage of disposable income) fell to 2.6% – its lowest level since 2022. That was during the recovery from COVID-19.

“With inflation eating into income growth, consumers are increasingly drawing down savings to sustain spending,” Richard de Chazal, macro analyst at William Blair, wrote after the personal income and outlays report was released by the Bureau of Economic Analysis on Thursday.

Tax Cut Bump Has Faded

Americans generally have two ways to pay for their spending: income in the form of wages and other payments, and assets they hold that can be sold to raise cash. Many of those in the lower and middle income groups have to rely on wage growth, now averaging an annual rate of 3.6%, while upper income consumers have enjoyed a rising stock market that they can tap if need be.

“Consumers had been getting a lift from last year’s tax cuts, but that tailwind is fading as higher gasoline prices and war-related uncertainty offset some of the expected gains from larger refunds,” de Chazal added.

In 2021, pandemic-era labor shortages lifted wages by 8.9% on average, but that moderated to 4.84% by 2024. This year, it is running 3.6% – just a hair under consumer prices that are increasing by 3.8 as of June.

A slowing economy and rising inflation is a situation that economists refer to as “stagflation” – a condition where lower rates don’t work well as a stimulant because of stubborn inflation. The rate of annual growth in gross domestic product was reduced to 1.6% last week from an initial estimate of 2%. Further contraction in growth coupled with sticky inflation will challenge a Federal Reserve not currently disposed toward lower interest rates.

As a result, consumers may be forced to dip further into their savings or reach for their credit cards. But credit card debt is now $1.25 trillion as of the first quarter, slightly lower than in late 2024, but still $325 billion more than it was in the last quarter of 2019, a year in which inflation was 1.8%. And the average interest rate on credit debt for those who maintain a balance is 21%.

“We expect this stress on consumers to continue in the coming months until we see a meaningful drop in inflation,” says David Royal, chief financial officer at Thrivent.

That won’t happen for a while, even if a ceasefire between the U.S. and Iran is agreed to. Disruptions in supply chains and damages to key oil infrastructure throughout the Middle East could mean oil prices remain elevated for months.

Oil prices did lose around 20% a barrel on Friday after President Donald Trump said he would review the latest proposal from Iran over the weekend. But a top executive at Exxon Mobil also warned Friday that global inventories of oil were reaching a critical low point that could see the price of the liquid gold spike in the coming weeks.

There was little movement Monday as a ceasefire remains elusive and oil hovers around $94 a barrel. Both sides reported limited attacks on each other over the weekend.

The most recent inflation forecast from the Fed has prices rising at an average of 2.7% this year, with the Organization for Economic Cooperation and Development coming in with a 4.2% estimate for the U.S.

Whoever is right may not matter to everyday American consumers, who likely will find it a struggle to meet their expenses without dipping further into their savings.

Experts note that in prior times when the savings rate dipped, consumers had cushions in the home equity built up in their homes as well as pandemic payments that helped cash flow.

“Today, there is little room to keep spending by saving less,” Felix Vezina-Poirier, chief strategist at BCA Research, said in an email on Friday. “If the Strait of Hormuz remains closed, the risk of a further domestic demand slowdown is clear.”

A closely watched measurement of US consumer sentiment fell to a fresh, all-time low in May, according to the latest survey from the University of Michigan.

The May consumer sentiment index dropped for the third consecutive month, falling to 44.2 and landing below the previous record low of 49.8 set in April.

The US-Israeli war in Iran and its subsequent oil supply crunch and price shocks have worsened sentiment that already was soured by years of high inflation and an affordability crisis.

“The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month,” Joanne Hsu, director of the university’s Surveys of Consumers, wrote in a statement.

Consumers’ personal finances sank by 13% in May, she said.

The University of Michigan’s sentiment survey dates back to 1952: Americans are feeling worse now than they did during wars, the 1970s oil crisis, 9/11, the Great Recession, the Covid-19 pandemic and the inflation surge afterward.

Some of the sharpest declines in sentiment came from lower-income consumers and those without college degrees, she said, noting that increases in the cost of fuel and other essentials hit those groups particularly hard.

War, gas prices become an albatross

US gas prices are nearing all-time highs as the Strait of Hormuz – an important passageway for the shipping of oil and other critical goods – has been effectively choked off for nearly three months.

“Earlier this year, consumers may have reserved judgment about how long the Iran conflict would last,” Hsu said. “Three months into the conflict, consumers appear to be worried that supply disruptions are unlikely to be resolved quickly.”

Consumers are also concerned that the high oil and gas prices will spread through the economy and make other goods and services even more expensive, she added.

To that end, consumers’ year-ahead inflation expectations edged higher to 4.8% from 4.7% in April, and the five-year expected inflation rate jumped to 3.9% from 3.5%. The near- and long-term expectations are back at rates hit during the latter part of last year, when tariffs added to inflationary pressures.

Among the respondents with the biggest increases in long-term inflation expectations were those with political affiliations of independent and Republican, Hsu noted.

“For the latter group, long-run inflation expectations are currently more than double their February 2025 reading on a monthly basis,” she said.

Consumers’ expectations about the pace of future price hikes are closely tracked by the Federal Reserve. If people believe that prices will only continue to rise, they might spend more now and demand higher wages, and businesses might raise prices to accommodate higher demand and wages – thus raising inflation.

The dour sentiment reading comes at a time when a large swath of data paints a picture of a resilient US economy while the stock market continues to hit new highs.

Not all Americans feel that.

“The American consumer is treading water here, and the income tax refunds must be gone already or the money spent on the higher prices seen everywhere in the economy,” Christopher Rupkey, chief economist at FwdBonds, wrote in a statement to investors Friday. “The stock market record highs are having no effect whatsoever on cheering consumers up which means most Americans have the money locked up in 401K retirement accounts that cannot be drawn on to make life easier now.”

Four of America’s largest retailers will report their quarterly earnings this week, and the most pressing question the reports will answer is whether Americans are finally starting to buckle under the weight of rising prices.

The results from Home Depot, Lowe’s, Walmart and Target are expected to offer one of the clearest snapshots yet of how U.S. households are navigating an economy increasingly under strain from soaring gas prices, stubborn inflation and elevated borrowing costs.

The stakes are especially high as rising energy prices continue to ripple through the broader economy, driving up transportation, grocery and household costs when many consumers are already stretched thin.

Economists, investors and journalists will parse the financial results and the accompanying commentary from corporate leaders looking for explicit signs of strain: Are shoppers trading down to cheaper products? Delaying home improvement projects? Or pulling back on discretionary purchases to prioritize essentials?

Home Depot kicked off the closely watched earnings parade Tuesday morning, reporting a 5% increase in sales from a year earlier.

But executives also said the consumer is still spending selectively.

“The main thing is just this uncertainty that’s holding them back for taking on large projects,” Home Depot CEO Ted Decker told analysts during the company’s earning call, adding that “larger discretionary projects remain under pressure.”

Still, he said customers remain engaged in smaller seasonal purchases and outdoor projects, with strength in categories like grills, patio furniture and outdoor power equipment.

Meanwhile, the company’s chief financial officer told CNBC that homeowners are “more protected financially” than other customers but noted that they’re also holding off on more expensive projects. Affordability is a big challenge in the housing market, in which average mortgage rates nationwide Monday hit 6.68% for a 30-year fixed loan, according to Mortgage News Daily.

“If it’s higher for longer on rates in a slow housing market,” Decker added on the call, “we’re just going to have to keep working our way through this period of moderation.”

The Home Depot results echo early spring spending data that suggests consumers are still holding up all right — but not evenly.

According to a recent report from the Bank of America Institute, total credit and debit card spending per household rose 4.8% in April from a year ago, the strongest single-month increase in three years.

But beneath the headline resilience, economists say, an even sharper divide is emerging.

The so-called K-shaped economy — in which spending by wealthier households accounts for an outsized share of overall consumer spending while lower-income families struggle — has widened in recent months, according to economists.

The report found lower- and middle-income consumers were increasingly pulling back on discretionary spending categories like dining and entertainment, while wealthier households — boosted by strong stock market gains and rising home equity values — continue to spend at a healthy pace.

And with inflation running at 3.8% in April, above the wage growth rate of 3.6% that month, economists warn that financial pressure on lower-income households could intensify.

And if the gap continues to widen, it could complicate the Federal Reserve’s path under the incoming chair, Kevin Warsh, who is expected to be sworn in as the central bank’s next chief Friday.

Warsh, who already said he was open to “regime change” at the Fed, will assume the top job when persistent inflation could force the central bank to keep interest rates higher for longer than anyone could have imagined just a few months ago — to prevent the economy from overheating.

Higher benchmark interest rates from the Fed have a direct impact on consumer lending costs, which means the same elevated borrowing costs would continue to keep the pressure on businesses and consumers who are already struggling to keep up with rising costs.

“While households still have some near‑term buffers — including tax refunds and savings — these too are unevenly distributed, underscoring the growing gap between headline resilience and stress experienced by some households,” Bank of America economists said.

Here’s a snapshot of prominent economic data and news that occurred over the past week and what it potentially means for you.

Gas prices fuel inflation surge of 3.8% in US

U.S. consumer prices climbed sharply again last month as the 10-week war with Iran pushed energy prices higher.

The Labor Department’s consumer price index rose 3.8% from April 2025, according to data released Tuesday. On a month-to-month basis, April prices rose 0.6% from March as gasoline prices rose 5.4% during the month; the month-over-month gain was down from a 0.9% increase from February to March.

Labor Department figures showed that gasoline prices are up more than 28% compared to a year ago. AAA says the average gallon of gasoline costs motorists more than $4.50 a gallon, about 44% more than it cost last year at this time.

Wholesale inflation came in hot during April

U.S. wholesale inflation came in hot last month. Producer prices rose 6% from a year earlier, the most since December 2022, as the 10-week Iran war pushed up energy prices and put pressure on companies to pass along higher costs to consumers.

The Labor Department reported Wednesday that its producer price index — which tracks inflation before it hits consumers — shot up 1.4% in April, the biggest monthly gain since March 2022.

Energy prices climbed 7.8% from March to April and 22.7% from a year earlier. Gasoline soared 15.6% from March and diesel, the dominant fuel used in shopping, jumped 12.6%.

Excluding volatile food and energy costs, so-called core producer prices were up 1% from March and 5.2% from April 2025.

All the numbers were much higher than economists had forecast.

Applications for unemployment benefits rise as Iran war drags on

The number of Americans filing for jobless aid rose last week but remains historically low despite the economic uncertainty caused by the war in Iran.

U.S. applications for unemployment benefits for the the week ending May 9 rose by 12,000 to 211,000, the Labor Department reported Thursday. That’s slightly more than the 207,000 new applications analysts surveyed by the data firm FactSet had forecast.

Weekly filings for unemployment benefits are considered a proxy for U.S. layoffs and are close to a real-time indicator of the health of the job market.

Despite relatively few layoffs, the labor market appears to be stuck in what economists call a “low-hire, low-fire” state. That has kept the unemployment rate low at 4.3%, but left many of those out of work struggling to find new employment.

Retail sales growth slows in April

Shoppers pulled back on spending in April as higher gas prices fueled by the Iran war meant less money left over for some nonessentials like clothing and furniture.

Retail sales rose a respectable 0.5% in April, but that was slower than the 1.6% growth seen in March, according to Commerce Department data released Thursday. March marked the largest one-month increase in retail spending in more than three years, largely because gas prices rose so rapidly.

Excluding gasoline, retail sales in April were up 0.3%. That’s less than half the 0.7% pace from the previous month, excluding gas station sales.

US home sales flat last month

Sales of previously occupied U.S. homes were essentially flat in April, another lackluster showing for the housing market during what’s traditionally its busiest time of the year.

Existing home sales edged up 0.2% last month from March to a seasonally adjusted annual rate of 4.02 million units, the National Association of Realtors said Monday. Sales were unchanged compared to April last year.

The latest sales figure fell short of the roughly 4.12 million pace economists were expecting, according to FactSet.

Sales have been hovering close to a 4 million annual pace now going back to 2023, far short of the historic norm that is closer to 5.2 million.

Average US long-term mortgage rate moves lower

The average long-term U.S. mortgage rate edged lower this week, its first drop after rising the previous two weeks.

The benchmark 30-year fixed rate mortgage rate fell to 6.36% from 6.37% last week, mortgage buyer Freddie Mac said Thursday. One year ago, the rate averaged 6.81%.

Borrowing costs on 15-year fixed-rate mortgages, popular with homeowners refinancing their home loans, also eased this week. That average rate fell to 5.71% from 5.72% last week. A year ago, it was at 5.92%, Freddie Mac said.

Stocks slide worldwide on inflation worries

The U.S. stock market was falling from its records Friday and joining a worldwide stock market drop as higher oil prices sent a shiver through the bond market. Stocks that had been caught up in the euphoria around artificial-intelligence technology that rose sharply for most of the week, led the decline Friday.

The consumer price index rose at a seasonally adjusted 0.6% for the month, putting the one-year pace at 3.8%, the Bureau of Labor Statistics reported Tuesday. The monthly rate was as forecast, but the annual rate was 0.1 percentage point above the Dow Jones consensus.

Excluding food and energy, the core CPI increased 0.4% and 2.8%, respectively, keeping inflation well above the Federal Reserve’s 2% goal as the monthly rate was the highest since January 2025. Fed officials consider core a better indicator of longer-term inflation trends.

The annual headline inflation rate was the highest since May 2023 and was up half a percentage point from March. Core inflation rose 0.2 percentage point annually.

Energy prices, which jumped 3.8%, accounted for more than 40% of the headline gain, while food prices also climbed 0.5%. For energy, that put the 12-month gain at 17.9%, while food was up 3.2%. The gasoline index increased 28.4% annually. Food at home prices increased 0.7%, the biggest monthly gain since August 2022.

Though energy and in particular gasoline has been much of the headline story, inflation pressures also came from a variety of other areas.

Shelter costs rose 0.6% after easing in prior months, indicating that inflation is a problem beyond the Iran war impacts. The tariff-sensitive apparel category increased 0.6% and airline fares accelerated 2.8%, putting the 12-month gain at 20.7%. Tariffs also seemed to hit other areas, with household furnishings and operations up 0.7%.

New vehicle prices fell 0.2% while the index for used cars and trucks was flat. Medical care costs decreased 0.1% and hospital services were down 0.3%. Health insurance also declined 0.4%, while motor vehicle insurance increased 0.1%.

The report also contained bad news for workers, as real average hourly wages slipped 0.5% for the month and fell 0.3% annually.

Stock market futures were negative following the report while Treasury yields were higher. Traders also raised the odds for a Fed rate hike by the end of the year to about 30%, according to CME Group data.

“Inflation is the key drag on the U.S. economy now,” said Heather Long, chief economist at Navy Federal Credit Union. “This is hurting Americans. There is a real financial squeeze underway. For the first time in three years, inflation is eating up all wage gains. This is a setback for middle-class and lower-income households and they know it.”

The latest inflation news comes at a crossroads for the Fed, which has kept its benchmark interest rate steady all year amid misgivings among policymakers both on where the central bank should be heading and how it should communicate its intentions.

In late April, the Fed voted again to hold but saw four dissents, the highest since 1992. Fed Governor Stephen Miran again voted no in favor of a quarter percentage point cut, while three regional presidents objected to language that markets read as an indicator that the next move will be a cut.

At the same time, incoming Chair Kevin Warsh has advocated for lower rates, a position that will be difficult to square with the burst of inflation since the fighting in Iran began. Energy prices have surged, with oil running above $100 a barrel and gasoline averaging $4.50 a gallon nationally, according to AAA.

“Given that inflation is heading in the wrong direction and the labor market is holding up, it’s very unlikely that the Fed will be able to lower interest rates any time soon and it’s possible that we may start pricing in rate hikes for next year,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.

Amid the higher rates, consumer sentiment has hit all-time lows though the stock market has been resilient. Major averages are just off their all-time highs as corporate America is nearing the end of a strong earnings season.

Consumer spending also has held up, though it’s largely been pushed by higher-income earners and the general trend higher in prices. The Atlanta Fed’s GDPNow tracker of incoming economic data is pointing toward economic growth of 3.7% in the second quarter, though on a limited set of data for the period.

“The good news is that the economy looks resilient to this price shock so far,” said James McCann, senior economist for investment strategy at Edward Jones. “Many consumers have benefited from tax refunds this year, hiring has picked up from near stagnant rates in 2025 and businesses are generating robust profit growth. There are limits to these buffers, but we expect, they should provide some reassurance that the economy can weather this shock.”

The reason is inflation, which describes the gradual rise in prices and slow decline in purchasing power of your money over time. Here’s how to understand inflation, plus a look at the steps that you can take to protect the value of your money.

How Does Inflation Work?

Inflation occurs when prices rise across the economy, decreasing the purchasing power of your money. In 1980, for example, a movie ticket cost on average $2.89. By 2025, the average price of a movie ticket rose to $16.08.

Don’t think of inflation in terms of higher prices for just one item or service, however. Inflation refers to the broad increase in prices across a sector or an industry, like the automotive or energy business—and ultimately a country’s entire economy.

The chief measures of U.S. inflation are the Consumer Price Index (CPI), the Producer Price Index (PPI) and the Personal Consumption Expenditures Price Index (PCE), all of which use varying measures to track the change in prices consumers pay and producers receive in industries across the whole American economy.

Though it can be frustrating to think about your dollars losing value, most economists consider a small amount of inflation a sign of a healthy economy. A moderate inflation rate encourages you to spend or invest your money today, rather than stuff it under your mattress and watch its value diminish.

Inflation can become a destructive force in an economy if it is allowed to get out of hand and rise dramatically.

What Is Deflation?

When prices decline across a sector of the economy or throughout the entire economy, it’s called deflation. While it might seem nice that you can buy more for less tomorrow, economists warn that deflation can be even more dangerous for an economy than unchecked inflation.

When deflation takes hold, consumers delay purchases in the present as they wait for prices to decline even further in the future. If left unchecked, deflation can diminish or freeze economic growth, which in turn decimates wages and paralyzes an economy.

Extreme Inflation: Hyperinflation & Stagflation

When inflation isn’t kept in check, it’s commonly known as hyperinflation or stagflation. These terms describe out-of-control inflation that cripples consumers’ purchasing power and economies.

What Is Hyperinflation?

Hyperinflation occurs when inflation rises rapidly and the value of the currency of the country tumbles rapidly.

Economists define hyperinflation as taking place when prices rise by at least 50% each month. Though rare, past instances of hyperinflation have taken place during civil unrest, during wartime or when regimes have been taken over, rendering currency effectively worthless.

Perhaps the best-known example of hyperinflation took place in Weimar Germany, in the early 1920s.

What Is Stagflation?

Stagflation occurs when inflation remains high, but a country’s economy is stagnant, and its unemployment is rising. Usually, when unemployment increases, consumer demand decreases as people watch their spending more closely. This decrease in demand lowers prices, helping to recalibrate your purchasing power.

When stagflation happens, however, prices remain high even as consumer spending decreases, making it increasingly expensive to buy the same goods.

We don’t have to look abroad to find examples, as the U.S. experienced stagflation in the mid to late 1970s. High prices from the Organization of the Petroleum Exporting Countries (OPEC) oil embargoes in the 1970s drove inflation higher as a recession lowered gross domestic product (GDP) and increased unemployment.

What Causes Inflation?

The gradually rising prices associated with inflation can be caused in two main ways: demand-pull inflation and cost-push inflation. Both come back to the fundamental economic principles of supply and demand.

Demand-Pull Inflation

Demand-pull inflation is when demand for goods or services increases, but supply remains the same, pulling up prices.

In a healthy economy, people and companies increasingly make more money. This growing purchasing power allows consumers to buy more than they could before. In turn, this increases competition for existing goods and raises prices while companies attempt to ramp up production. On a smaller scale, demand-pull inflation can be caused by sudden popularity of certain products.

For example, at the start of the Covid-19 pandemic, the increase in demand for indoor, socially distant activities combined with the highly anticipated release of Animal Crossing: New Horizons saw the price of the Nintendo Switch gaming system almost double on some secondary markets. Because Nintendo could not increase production, due to factory production halts from Covid-19, Nintendo could not raise its supply to meet rising consumer demand, resulting in increasingly higher prices.

Cost-Push Inflation

Cost-push inflation is when the supply of goods or services is limited in some way. But demand remains the same, pushing up prices. Usually, some sort of external event, like a natural disaster, hinders companies’ abilities to produce enough of certain goods to keep up with consumer demand. This allows them to raise prices, resulting in inflation.

For example, think about oil prices. You—and pretty much everyone else—need a certain amount of gas to fuel your car. When international treaties or disasters drastically reduce the oil supply, gas prices rise because demand remains relatively stable even as supply shrinks.

How Is Inflation Measured?

The U.S. inflation rate is measured by the CPI, PPI and PCE indexes. Because no single index captures the full range of price changes in the U.S. economy, economists must consider these multiple indexes to get a comprehensive picture of the rate of inflation.

The basic formula to calculate the inflation rate is as follows:

Consumer Price Index (CPI)

The U.S. Bureau of Labor Statistics calculates monthly based on the changes in prices consumers pay for goods and services. The CPI uses a “basket of goods” approach, meaning it tracks changes in the costs of eight major categories people spend money on: food and beverages, housing, apparel, transportation, education and communication, recreation, medical care, and other goods and services.

Many consider CPI as the benchmark for measuring inflation in the U.S.

CPI is especially important because it is used to calculate cost of living increases for Social Security payments and for many companies’ annual raises. It is also used to adjust the rates on some inflation-protected securities, like Treasury Inflation-Protected Securities (TIPS).

Producer Price Index (PPI)

Also published by the Bureau of Labor Statistics, PPI tracks the changes in prices that companies receive for the goods and services they sell each month. Costs can rise when producers face an increase in tariffs, higher oil and gas prices to transport their items, or other issues, such as the impact of a long-lasting pandemic or environmental changes, like a rise in hurricanes, wildfires or flooding.

The PPI plays an important role in business contracts. Businesses that enter long-term contracts with suppliers frequently use the PPI to automatically adjust the rate they pay for raw goods and services over time. Otherwise, suppliers would lock themselves into yearslong contracts at rates that might lose their purchasing power over the long term.

Personal Consumption Expenditures Price Index (PCE)

Published by the Bureau of Economic Analysis (BEA), PCE tracks how much consumers pay for goods and services in the economy.

PCE considers a broader range of consumer expenditures than CPI, like healthcare spending. It also updates the basket of goods it uses for calculations based on what consumers are spending money on each month, rather than limiting data to a fixed set of goods.

PCE is an especially important measure because it’s the Federal Reserve’s preferred measure of inflation when making monetary decisions, such as rate hikes or cuts.

Inflation and the Fed

The Federal Reserve is the central bank of the U.S., and the Fed—like central banks around the world—is tasked with maintaining a stable rate of inflation.

The Federal Open Markets Committee (FOMC) has determined that an inflation rate around 2% is optimal for employment and price stability.

This level of inflation gives the FOMC scope to jump-start the economy during downturns by decreasing interest rates, which makes borrowing cheaper and helps boost consumption. Lower interest rates reduce costs for businesses and consumers to borrow money, stimulating the economy. Lower interest rates also mean individuals earn less on their savings, encouraging them to spend. But all this extra demand can push up inflation.

How Does Inflation Impact the Stock Market?

Some inflation can be a sign of a healthy, growing economy, but when inflation rises higher than expected or becomes unpredictable, it tends to hurt investors and businesses alike.

When inflation rises sharply, companies face higher costs for materials, labor and transportation. If they can’t raise prices to match those costs, their profit margins will shrink.

Inflation also tends to influence the Federal Reserve’s decisions. When prices rise too quickly, the Fed has been known to increase interest rates to preserve the economy. Higher rates make borrowing more expensive for businesses and consumers, which can slow growth.

However, not all industries react the same way. Energy, utilities and consumer staples, for instance, can often pass increased costs onto consumers to remain profitable. Meanwhile, growth stocks and tech companies may struggle.

What Investments Beat Inflation?

Even a moderate rate of inflation means that money held as cash or in low-APY bank accounts will lose purchasing power over time. You can beat inflation and boost your purchasing power by investing your money in certain assets.

To overcome inflation, “A good portfolio could include shorter-maturity bonds, a bit of TIPS, commodities and gold, and ideally a share of real assets that generate income, adjusting exposures as inflation expectations change, rather than thinking one static mix will work,” says Alex Tsepaev, chief strategy officer at B2Prime Group, a global financial services provider for professional and institutional clients.

Beat Inflation with Stocks

Investing in the stock market is one way to potentially beat inflation. While individual stock prices may fall and companies may go out of business, broader stock market indexes rise over the long run, beating inflation.

From 1937 to 2025, the S&P 500, which tracks the performance of 500 of the largest companies in the U.S., generated an average annual return of just over 12%, according to LSEG Datastream and Yardeni Research. This is a long-term average—in some years, the S&P 500 had lower or even negative returns.

Investing in individual stocks offers no guarantees, but a well-diversified investment in a broad market index fund can grow wealth over decades and beat inflation.

Beat Inflation with Bonds

Bonds on average offer lower returns than stocks, but they can also regularly beat inflation. Risk adverse investors or those approaching or in retirement may seek out the more consistent returns of investments in bonds and bond funds to beat inflation.

Treasury Inflation-Protected Security (TIPS)

Treasury Inflation-Protected Securities (TIPS) are a special class of U.S. Treasury bonds specifically designed to protect investors from inflation.

TIPS automatically adjust the value of your investment based on changes to CPI, meaning the value of your bond rises with inflation. TIPS pay interest over the five-, 10-, or 30-year life of the bond.

Can You Beat Inflation With Gold?

Many investors consider gold as the ultimate inflation hedge, although the debate over this proposition is far from settled.

The price of gold can fluctuate over time and is impacted by movements of global currencies. Monetary policy choices made by the Fed and other central banks, not to mention erratic supply and demand.

Investing in gold also comes with its own unique set of challenges. If you buy gold, you have to find a secure location or custodian to store it, which comes with costs of its own. If you sell gold after holding it for a year or more, it’s subject to higher long-term capital gains tax rates than stocks and bonds.

The US Federal Reserve kept interest rates unchanged on Wednesday, holding its benchmark policy rate in the 3.50 to 3.75 per cent range as it grapples with renewed inflation pressures driven by surging oil prices and geopolitical tensions.

The move was widely expected, but discussions around the decision reflected growing concern inside the Fed that inflation risks may not be fading as quickly as hoped.

“Developments in West Asia are contributing to a high level of uncertainty about the economic outlook,” the Fed said in a statement, adding that inflation is “elevated” in part due to the surge in energy prices.

The Fed added that while the unemployment rate has changed little in recent months, job gains remain low.

Fed policymakers are increasingly focused on the impact of surging oil prices driven by the Iran war. The continued closure of the strategic Strait of Hormuz has pushed Brent crude back above 110 dollars per barrel, compared with around 70 dollars before the escalation in February.

This has complicated the Fed’s inflation outlook, which is already under pressure.

Inflation in the US remains about one percentage point above the Fed’s 2 per cent target. The central bank also expects upcoming inflation data to show further upward pressure, adding to the challenge of bringing price growth under control.

Against this backdrop, the US economy continues to show resilience.

Job growth has remained surprisingly firm, and unemployment has eased to around 4.3 per cent. That resilience reduces pressure on the Fed to cut rates in the near term.

However, economists say the combination of sticky inflation and strong employment is pushing the central bank toward a more cautious stance.

Markets are now pricing in a prolonged period of higher interest rates, with traders seeing little chance of cuts before mid-next year.

The decision also comes at a politically sensitive moment for the US central bank, with Jerome Powell nearing the end of his term as Fed chair on May 15.

The University of Michigan’s final April sentiment index dropped to 49.8 this month from 53.3 in March. While that was slightly improved from the preliminary reading, it remained the lowest in data going back to 1978.

Consumers expect prices to rise at an annual rate of 4.7% over the next year, up from 3.8% in March, the data released on Friday showed. That was the biggest one-month increase since President Donald Trump announced sweeping tariffs last year.

They saw costs rising at an annual rate of 3.5% over the next five to 10 years, the highest since October.

Sentiment has tumbled in the wake of the Iran war, which has driven up fuel costs for inflation-weary Americans. So far, though, retail sales data out earlier this week indicated consumers continue to spend on a broad range of merchandise.

While the US and Iran have agreed to a temporary ceasefire, the absence of a permanent deal to end the war is keeping uncertainty elevated for consumers and weighing on the outlook.

“The Iran conflict appears to influence consumer views primarily through shocks to gasoline and potentially other prices,” Joanne Hsu, director of the survey, said in a statement. “In contrast, military and diplomatic developments that do not lift supply constraints or lower energy prices are unlikely to buoy consumers.”

Analysts have warned that gas prices, currently around $4 a gallon, could remain elevated for months even if a deal is reached. That could continue to weigh on sentiment.

Americans are enjoying bigger tax refunds, which alongside signs of front-loading of purchases, helps explain at least some of the improvement in retail activity. Still, spending risks softening in the coming months as higher energy costs add to pressure on household budgets.

Consumers expect gas prices to climb nearly 50 cents in the coming year, though expectations differed by political affiliation. Overall, nearly two-thirds of respondents expect fuel costs to be higher a year from now, the largest share since 2022.

The current conditions gauge declined in April to a four-month low, while the expectations index dropped to the lowest in nearly a year.

Consumers’ perceptions of their expected financial situation was the weakest since May of last year.

The survey period includes responses from March 24 to April 20.

Gold fell in choppy trade on Thursday as elevated oil prices fuelled fears of inflation and prolonged high interest rates, while investors looked for clarity on stalled peace talks between the U.S. and Iran.

Spot gold was down 0.7% at $4,705.09 per ounce, as of 0215 GMT. U.S. gold futures for June delivery fell 0.6% to $4,722.10.

Brent crude oil prices remained above $100 a barrel after larger-than-expected gasoline and distillate stock draws in the United States, and over a lack of progress on the peace talks. [O/R]

”The sight of Brent oil back at triple digits is keeping inflation worries at the forefront, and is putting gold on the back foot today,” said Tim Waterer, chief market analyst at KCM Trade.

Higher crude oil prices can stoke inflation by raising transportation and production costs, increasing the likelihood of higher interest rates.

While gold is considered an inflation hedge, high interest rates make yield-bearing assets more attractive, weighing on bullion’s appeal.

Iran seized two ships in the Strait of Hormuz on Wednesday, tightening its grip on the strategic waterway after U.S. President Donald Trump called off attacks with no sign of the peace talks restarting.

Trump maintained the U.S. Navy blockade of Iran’s trade by sea, and Iran’s ​parliament speaker and ​top negotiator Mohammad Baqer Qalibaf said a full ceasefire only made sense if it was lifted.

”Investors are worried that this ’ceasefire-plus-blockade’ status quo could drag on for months, turning a short-term spike into a long-term inflationary anchor, which would hurt gold from a yield perspective,” said Waterer.

Meanwhile, a Reuters poll of economists showed the U.S. Federal Reserve will likely wait at least six months before cutting interest rates this year as war-driven energy shocks reignite already-elevated inflation.

Traders now see a 23% chance of a 25-basis-point Fed rate cut in December, down from 28% a week ago. Before the war, there were expectations of two reductions for this year. [FEDWATCH]

Spot silver fell 1.4% to $76.64 per ounce, platinum lost 1.3% to $2,048.25, and palladium was down 1% at $1,529.25.