Yesterday I told you what I was watching for in the April inflation report. The number I flagged as a risk — headline CPI coming in above 3.7%, driven by energy prices — landed this morning. Here’s the verdict.
April inflation came in at 3.8% annually. That’s higher than the 3.7% economists expected and the fastest rate since May 2023. Core inflation, which strips out food and energy, rose 2.8% — also slightly above forecast. Both numbers moved in the wrong direction.
Markets felt it immediately. The Nasdaq fell roughly 2%. The Russell 2000, which is more sensitive to interest rate expectations, dropped more than 2.3%. And futures traders who were already skeptical about rate cuts are now pricing in no cuts at all in 2026.
What Actually Drove This
Here’s the part that matters most for understanding what happened: energy prices rose 3.8% in April alone, and they accounted for more than 40% of the entire monthly CPI increase. That’s not random inflation. That’s the Iran war.
The Strait of Hormuz has been largely closed since February. Oil tankers can’t pass through freely. That’s raising the cost of fuel, which raises the cost of transportation, which bleeds into nearly every price category in the economy. You see it at the pump. The CPI report just confirmed you see it everywhere else too.
The Fed knows this isn’t domestically driven inflation. They know the root cause is geopolitical. But they also know their job isn’t to fix wars — it’s to keep prices stable. As long as energy stays elevated because of the Hormuz situation, the numbers are going to stay uncomfortable, and rate cuts stay off the table.
The Technical Adjustment I Warned You About
Yesterday I flagged a one-off adjustment to how the government measures rent and housing costs — a correction for data missed during last fall’s government shutdown. That adjustment came through in today’s report. It added some upward pressure that may not reflect the underlying trend.
In plain terms: part of today’s number is real inflation, and part of it is a statistical catch-up. Experienced investors and Fed officials understand the difference. Markets don’t always take the time to sort it out. That may explain some of why the selloff today felt sharper than the actual economic picture warrants.
What I’d Do With This Information
I’m not selling anything because of today’s CPI print. I said that yesterday, and I meant it. Here’s my honest thinking on what this data changes and what it doesn’t.
What it changes: rate cut expectations are gone for 2026. If you were counting on lower borrowing costs to bail out any position in your portfolio — a highly leveraged company, a speculative name that needs cheap capital to survive — that thesis needs revisiting.
What it doesn’t change: the AI revenue story that drove the last six weeks of market gains is still intact. Microsoft Azure grew 40% last quarter. AWS grew 28%. Those aren’t inflation-sensitive numbers. Companies generating real earnings with real pricing power can navigate sticky inflation. They’ve done it before.
The stocks that worry me in this environment are the ones that were priced for perfection and require a combination of strong earnings AND falling rates to justify their valuations. That combination isn’t coming anytime soon.
The rest? Today was a reset, not a reversal. Six weeks of records don’t just evaporate because one inflation print came in 0.1% hotter than expected. But it’s a reminder that the path higher was never going to be straight up.
