Why Energy Is Running the Show
April's CPI number looks alarming at the headline level, but the breakdown tells a more specific story. Energy alone accounted for more than 40% of the entire monthly increase, with gasoline up 5% on the month and 28.4% over the past year.* The overall energy index is now 17.9% higher than a year ago, a direct consequence of the Iran conflict and the disruption to shipping through the Strait of Hormuz. Core inflation, which strips out food and energy, came in at 2.8% annually, its highest since September 2025, but still well below the headline figure. Shelter rose 0.6% on the month, food added 0.5%, and airline fares jumped 2.8% in April alone, up 20.7% over the year. The picture is not one of a broadly overheating economy. It is one where a geopolitical shock is feeding directly into consumer prices, and the Fed has limited tools to address the root cause.
The general United States Gasoline Prices index performance over the past five years*
The New Fed Chair Inherits a Mess
Kevin Warsh arrives at the Fed at a moment that would test any central banker. During his Senate confirmation hearing in April, he was asked directly whether Trump had pressured him to cut rates. His answer was unambiguous: the president never once asked him to commit to any particular interest rate decision. He also told the committee that inflation is a choice and the Fed must take responsibility for it. That kind of language signals a chair who will prioritize credibility over political comfort, at least in public. But Warsh also comes with an unconventional framework. He wants to replace the Fed's current core PCE benchmark with trimmed average measures that strip out extreme price movements, including war-driven energy spikes. Under that approach, Bank of America's analysis found that current inflation would read closer to 2.3% rather than the headline 3.8%. That is not a technicality. It is a significant shift in how the Fed defines the problem it is trying to solve, and it has real consequences for when and whether rate cuts become justifiable. On top of that, Warsh has signaled plans to reduce the Fed's $6.7 trillion balance sheet closer to $3 trillion, a move that would tighten financial conditions even without touching the policy rate.
What the Rate Market Is Actually Pricing
The Fed has held rates at 3.5 to 3.75% through three consecutive meetings in 2026, and Tuesday's inflation data did nothing to change that picture in the near term. CME FedWatch is currently showing a roughly 71.5% probability that rates stay unchanged through the end of the year. A CNBC survey of 26 Fed watchers found that, on average, respondents do not expect a single cut in 2026, with only 58% expecting any reduction at all. Rob Morgan from Mosaic put it plainly: Warsh will probably face challenges in delivering the rate cuts Trump wants, as oil prices and inflation are likely to stay elevated for an extended period. The University of Michigan's latest consumer survey puts one-year inflation expectations at 4.8%, the highest in seven months, which is the kind of number that tends to make a central bank cautious, regardless of who is running it. The base case right now is no movement until at least the fourth quarter, and that is before accounting for what May and June CPI prints look like once this month's energy shock fully feeds through.
What This Means for Investors
The market has so far absorbed the April CPI number without a significant reaction, partly because the energy-driven composition makes it easier to look through. But the combination of a new Fed chair, a frozen rate cycle, and inflation running at 3.8% creates a backdrop where the range of outcomes is wider than it has been in some time. In the short term, energy equities, oil producers, and inflation-linked assets remain in a favorable position. Bonds face continued pressure if the last remaining cut expectations for this year continue to get priced out. For equities, the S&P 500 is trading at elevated multiples against a backdrop where the cost of capital is not falling, and the earnings outlook depends heavily on whether energy costs stabilize. The deeper question for investors is not what Warsh will do in his first press conference. It is whether his new inflation measurement framework, if adopted, will effectively redefine what the Fed considers acceptable, and how long it takes markets to figure out whether that is a genuine policy shift or just a different way of reading the same data.
* Past performance is no guarantee of future results
Sources:
https://www.bls.gov/news.release/cpi.nr0.htm
https://www.reuters.com/markets/us/warsh-led-feds-2-inflation-goal-might-be-different-2-2026-04-23/
https://www.cnbc.com/2026/04/22/kevin-warsh-inflation-trend-pce-trump.html
https://www.politico.com/news/2026/04/29/warsh-fed-powell-trump-iran-inflation-00896496
