US inflation hits its highest level since 2023. Here’s how investors should navigate the US market

Key Points

Inflation pressures are starting to broaden beyond energy

US inflation accelerated sharply in April, with the Consumer Price Index (CPI) rising 3.8% year-on-year, up from 3.3% in March and above the consensus forecast of 3.7%. This marks the highest reading since 2023, driven largely by the US-Iran conflict and its disruption to global energy markets. Energy costs surged 17.9% year-on-year in April, versus 12.5% in March. On a month-on-month basis, CPI rose 0.6%, easing from the 0.9% jump in March, which was the largest monthly gain since 2022.

Gasoline prices have soared more than 50% to a national average of US$4.50 a gallon since hostilities erupted, as the conflict disrupted shipping through the Strait of Hormuz — the critical chokepoint through which roughly a fifth of the world’s oil and liquefied natural gas once flowed.

Core CPI, which strips out volatile food and energy prices, also accelerated to 2.8% year-on-year from 2.6% in March, exceeding forecasts of 2.7%. On a monthly basis, core CPI rose 0.4%, up from 0.2% in March.

Figure 1: US inflation accelerated in April due to the US-Iran conflict

The April data suggests that higher prices are no longer confined to the gasoline station. Food prices rose 0.5% month-on-month (MoM) in April after holding steady in March, reflecting the growing second-order effects of rising oil prices. Higher diesel costs are likely already increasing the operating expenses of agricultural machinery and transportation, while disruptions to fertiliser supply chains are also placing upward pressure on food prices. Gulf nations are major fertiliser exporters due to their access to low-cost natural gas, a key input in fertiliser production. However, the blockade of the Strait of Hormuz has disrupted both natural gas and fertiliser exports, raising fertiliser prices and increasing farmers’ input costs.

Rising fuel prices are also starting to affect transportation costs more directly. Airline fares rose 2.8% MoM in April after already increasing 2.7% in March, as airlines responded to higher jet fuel prices by raising ticket prices, increasing baggage fees, and trimming capacity.

Crucially, the latest Producer Price Index (PPI) data — a leading indicator of future consumer inflation — suggests that the 3.8% headline CPI reading may not yet represent the peak of current inflation pressures. Headline PPI accelerated sharply to 6.0% year-on-year in April from 4.3% in March, marking the highest reading since December 2022. Core PPI, which excludes food and energy, also rose significantly to 5.2% from 4.0% previously. The sharp rise in producer prices suggests that businesses are continuing to face mounting cost pressures, increasing the likelihood that higher prices could continue feeding through to consumers in the months ahead.

Consumers are feeling the strain, but growth should hold up

While inflation pressures have intensified, we believe the current conflict is unlikely to drag on indefinitely. Both the US and Iran are facing growing political and economic pressure respectively to de-escalate tensions.

For US President Donald Trump, rising gasoline prices are becoming an increasingly sensitive political issue ahead of the midterm elections, where his administration risks losing Congress to the Democrats. His approval rating has fallen to 36% from 42% at the start of the year, according to the latest Reuters/Ipsos poll, with many Americans expressing dissatisfaction over the rising cost of living. On the other side, Iran continues to face mounting economic strain as blockades restrict its ability to export crude oil.

That said, even if shipping through the Strait of Hormuz resumes soon, energy prices are unlikely to normalise immediately and the economic effects of the disruption are likely to linger for some time. Restoring oil production to pre-war levels takes time, while reopening disrupted shipping lanes does not instantly clear the backlog of delayed shipments. As a result, elevated energy prices could continue to weigh on consumers for several more months.

To cushion households from rising fuel prices, Trump has proposed temporarily suspending the federal gasoline tax of 18.4 cents per gallon. However, the impact is likely to be modest, with estimates from the Bipartisan Policy Center suggesting gasoline prices would fall by only around 10 to 16 cents per gallon.

Looking ahead, we expect persistently high fuel to place increasing pressure on household spending. As consumers allocate more income toward necessities, less remains available for discretionary purchases such as dining out, entertainment, and retail spending. Lower- and middle-income households are particularly vulnerable because energy and food account for a larger share of their overall spending.

The strain is already showing up in corporate earnings calls. Kraft Heinz CEO Steve Cahillane noted that lower-income consumers are “literally running out of money at the end of the month,” with many households increasingly dipping into savings to fund daily expenses. Similarly, McDonald's CEO Chris Kempczinski highlighted “heightened anxiety” among consumers and noted that elevated gasoline prices are disproportionately hurting lower-income customers.

Consumer sentiment surveys tell a similar story. The University of Michigan’s preliminary May sentiment index fell to 48.2 from 49.8 in April, reflecting growing concerns over inflation and affordability.

Nevertheless, we do not believe the current oil shock is severe enough to push the US economy into recession. Unlike previous decades, the US is now a net exporter of oil, meaning that some of the economic pain experienced by consumers is offset by stronger revenues within the domestic energy sector.

At the same time, investment in artificial intelligence (AI) continues to provide a meaningful source of economic support. Spending by hyperscalers on AI infrastructure remains exceptionally strong, with combined capital expenditures from the five largest US hyperscalers — Meta Platforms, Alphabet, Microsoft, Amazon, and Oracle — expected to exceed US$700 billion in 2026. Meta, Microsoft, and Alphabet have all raised capital expenditure guidance in their latest earnings reports.

This ongoing investment cycle should continue supporting activity across the broader digital economy even as consumer-facing sectors slow, providing an important cushion for overall GDP growth.

Prioritising structural AI growth

Against this backdrop, we remain cautious on consumer discretionary stocks, particularly businesses heavily exposed to lower- and middle-income households, where inflationary pressures are already weighing on spending patterns. Wingstop, for instance, reported domestic same-store sales declining 8.7% year-on-year, with management citing rising fuel prices that had “stressed the balance sheet of the lower-income consumer that our business over indexes to”.

Instead, we continue to favour sectors linked to the digital economy, where earnings growth is increasingly supported by long-term AI adoption trends rather than the strength of the US consumer.

According to FactSet data of 8 May 2026, the Information Technology sector is reporting the highest blended year-on-year earnings growth rate within the S&P 500 at 50.7%, while the Communication Services sector ranks second at 48.8%, driven largely by Alphabet and Meta Platforms. Both sectors remain well ahead of the broader S&P 500’s earnings growth rate of 27.7%.

(Note: "Blended" earnings growth combines actual reported results for companies that have already reported with analyst estimates for those that have not yet done so — giving a more timely, real-time picture of sector-level earnings trends)

Although the Consumer Discretionary sector is reporting the fourth-highest earnings growth rate at 39.7%, the figure is heavily skewed by Amazon. Excluding Amazon, the sector’s blended earnings growth rate would fall sharply to 14.9%, which would rank just ninth among the eleven S&P 500 sectors. This suggests that earnings growth within the sector is far less broad-based than headline figures imply, particularly as many consumer-facing businesses continue to grapple with weaker discretionary spending and mounting cost pressures.

In our view, earnings growth tied to structural AI demand appears more durable and broad-based than growth reliant on consumers already facing mounting cost-of-living pressures. Investors looking to gain exposure to the digital economy and the long-term AI investment cycle may therefore wish to focus on companies and funds positioned to benefit from these structural growth trends. For broader US exposure, we recommend investing in quality companies characterised by strong balance sheets, resilient earnings, and high return on equity, as they are better positioned to withstand near-term macro volatility.

Table 1: Recommended products

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.