Here’s something no American wants to hear: Prices are surging again, and uncomfortably high inflation could be with us for quite some time.
Inflation has been a thorn in the US economy’s side since 2021, and though price increases have cooled off dramatically in the past few years, the problem never really went away: Inflation still hasn’t returned to pre-pandemic levels, and Americans haven’t yet adjusted to higher prices. That’s why the cost of living has remained Issue No. 1 for voters in poll after poll.
This oil price shock almost certainly will not translate into the 9.1% four-decade high inflation that the United States painfully endured in 2022. But key differences between the situation today and four years ago could make this latest war-induced inflation spike very difficult to bear.
Layering
The US economy has been remarkably resilient despite everything thrown at it this decade — a pandemic, two wars, a historic inflation crisis, tariffs…. It’s tough to shake a $31 trillion titan. That’s why most economists agree the oil price shock from the Iran war probably won’t end in a recession.
But the economy doesn’t need to be in a recession to grow painful — just ask the millions of low- and middle-income Americans who have struggled to make ends meet over the past several years.
Unlike 2022, when savings accounts were still padded by government stimulus, an emergency pause on student loan debt repayments and other pandemic-related safety nets, in 2026, many Americans are borrowing money to get by — and they’re finding it harder and harder to keep up with those payments.
In February, Americans’ savings rate (savings as a percentage of after-tax income) was 4%, the latest Commerce Department data showed. In February 2020, that rate was 7.5%. And heading into the pandemic-era inflation burst, those piggy banks were plump (in part due to federal stimulus payments, refinances, and a sheer pullback of spending): The savings rate was 21.6% in March 2021, when inflation was starting to accelerate.
“Households do have less of a cushion now than they did two, three years ago,” Augustine Faucher, chief economist at PNC Financial Services Group, told CNN in an interview. “That means that this higher inflation is going to pinch more than it would have.”
Layer on top of rising prices: a frozen housing market, immigration restrictions that have exacerbated childcare and health care shortages, the elimination of key social services and historic tariffs … that’s a lot for folks to bear.
Now, add surging gas prices. That’s tipping some folks over the edge.
Paycheck gains
Despite how much Americans hate this economy, it’s had one saving grace: The average annual paycheck growth has exceeded the average rate of inflation for about three straight years.
Some economists — including Federal Reserve Chair Jerome Powell — argued that sentiment would eventually catch up to reality once Americans adjusted to higher prices, and paycheck gains padded their bank accounts.
That theory took a big blow to the noggin in March.
Annual wage growth shrank to just 3.5% on average last month, and annual inflation surged 3.3%. In one fell swoop, years of progress on inflation was set back, and Americans’ pay gains were practically eaten away.
“We’ve had a couple of years to try to heal and repair” from the pandemic-era inflationary burst, said Heather Long, chief economist with Navy Federal Credit Union. “To reverse that is painful.”
Surging gas prices have wiped out other economic benefits, too. For example, the average tax refund increased $351 this year, compared to last year. But the average US household is paying an additional $190 a month because of higher energy costs, according to Andy Lipow, president of Lipow Oil Associates. That will wipe out the tax refund benefit for the average American in just two months.
Duration
It’s alarming to see such a sharp increase in inflation in the first four weeks of the war. But what we saw in the March report is really just the beginning of an inflation rebound that could last for months.
Even in the most optimistic of scenarios, where the ceasefire agreement between the United States and Iran holds and the Strait of Hormuz reopens, consumer prices will remain high and inflation will almost certainly continue to gain for months.
That’s because oil shocks have both an immediate and a delayed effect on overall prices: Gas prices shoot higher right away, but other prices rise later as higher energy prices work their way through the economy.
For example, grocery prices fell in March, even as the cost of diesel surged. Eventually, higher diesel prices will send food prices higher because shipping companies will charge supermarkets more to deliver groceries. Food prices typically take three to six months — or even more than a year — after the initial shock to rise.
The sheer impact, however, is heavily dependent upon a highly unknown variable: The duration of the war and, particularly, the disruption to the Strait of Hormuz.
And those price hikes, no matter how small, can hit worse for some Americans than others, said Ken Foster, professor of agricultural economics at Purdue University.
“We have households in our country where the percentage of income spent on food is closer to 50%,” he said in an interview with CNN. “And when you add on fuel for heating your home or for transportation for you getting to work, you’re now talking about a sizable percentage of people’s income that’s really not adjustable.”
He added: “They haven’t been able to keep up in terms of their income, and this comes back to really put them in a financial bind.”
