US Inflation Pressures Rise as Iran Conflict Drives Energy Shock, Federal Reserve Report Finds

Prices in the United States have been rising at a “moderate to strong pace” in recent weeks, with surging energy costs linked to the war in Iran acting as the primary driver of inflation, according to the Federal Reserve’s latest Beige Book survey.

The report, which compiles economic conditions across the Fed’s 12 regional districts, found that energy-related expenses tied to the conflict in the Middle East have filtered through the wider economy. Officials noted that higher oil and gas prices have increased costs for shipping, packaging, groceries and fertiliser, adding fresh pressure to already strained supply chains.

The conflict, which escalated after the US and Israel launched military action against Iran on 28 February, has destabilised the region and triggered retaliatory strikes that disrupted key trade routes. The Strait of Hormuz, through which roughly one-fifth of global oil and gas supplies normally pass, has been effectively blocked, contributing to sharp spikes in global energy prices.

The Federal Reserve’s report highlighted that the inflationary impact has been uneven across sectors. While energy costs surged, some businesses reported that price increases were not keeping pace with rising input costs, forcing firms to absorb expenses through tighter profit margins in order to maintain consumer demand.

The Fed’s preferred inflation gauge rose in April at its fastest annual rate since 2023, according to separate government data released last month, underscoring persistent price pressures in the economy.

Consumer behaviour is also showing signs of strain. The Beige Book described a “K-shaped” pattern in spending, where higher-income households continue to maintain or increase consumption, while lower-income groups face growing financial pressure. Middle-income families, the report said, are increasingly cautious, stretching budgets further before making purchases.

In response, there has been greater reliance on credit cards, fewer retail visits and stronger demand for essential goods. Economists say these trends reflect growing divergence in household financial resilience across income levels.

Overall, economic activity across the United States continued to expand at a slight to moderate pace in 10 of the 12 Federal Reserve districts. One district reported a slight decline, while another showed no change.

Employment conditions remained largely stable, with little movement across most regions. However, manufacturing hiring showed relative strength in several districts, supported by defence-related production and rising demand linked to data centre expansion and artificial intelligence infrastructure.

Despite this, the Fed noted that labour market conditions remain cautious, describing a “low-hire, low-fire” environment in which workers are increasingly reluctant to change jobs due to economic uncertainty.

The report underscores how geopolitical tensions in the Middle East are increasingly shaping domestic economic conditions in the US, with energy markets acting as the main transmission channel for inflationary pressure.