April gave the Federal Reserve a problem that interest rates weren’t really designed to solve. The conflict involving Iran had begun at the end of February, and the Strait of Hormuz was effectively closed by early March. It’s one of the world’s most important routes for oil and natural-gas shipments. When tankers could no longer move through it normally, producers in the region lost access to many of their buyers.
At first, countries could store some of the oil or try to use other routes. Eventually, though, several producers had to reduce production because there was nowhere for the oil to go. In its April outlook, the Energy Information Administration estimated that 7.5 million barrels per day of production had been shut in during March and forecast that the disruption would reach 9.1 million in April. One month later, with more complete information, it estimated that the actual April disruption had reached 10.5 million barrels per day.
Brent crude averaged about $103 per barrel in March and $117 in April. On April 7, the spot price reached $138. That’s a huge change from the roughly $71 price before the conflict. A major shipping route had become largely unusable. Tankers were delayed, insurance costs rose and countries began competing for alternative supplies. Higher crude-oil prices don’t stay inside the oil market. They raise the price of gasoline and diesel. Diesel then raises the cost of moving groceries and almost everything else carried by truck. Businesses eventually have to absorb those costs or pass them on to customers.
At almost the same time, the administration added another source of higher costs. On April 2, it raised tariffs on imported steel, aluminum and many products made from those metals. Items made almost entirely from the affected metals faced a 50% tariff. Many derivative products faced a 25% rate, while some industrial equipment received a 15% rate through 2027. The Fed was therefore facing two different supply shocks at once. Oil had become harder to move, while important imported materials had become more expensive.
Inflation doesn’t always have the same cause. When prices rise because consumers and businesses are spending too much, higher interest rates can reduce demand. People borrow less, companies invest less and the economy cools. But higher interest rates can’t reopen a shipping route or create more steel.
They can only discourage people from buying other things.
The Fed kept its target rate between 3.50% and 3.75% at its April 28-29 meeting. Its statement said inflation remained elevated partly because of higher global energy prices. The meeting minutes went further. Officials discussed higher fuel and shipping costs, more expensive air travel, disruptions involving fertilizer and other commodities, tariff effects on goods prices and strong investment related to artificial intelligence. The April CPI report, released on May 12, showed how much energy was affecting the headline numbers. Overall consumer prices rose 0.6% during April and 3.8% over the previous year.
Core prices, which exclude food and energy, rose 0.4% during the month and 2.8% over the year. That difference between 3.8% headline inflation and 2.8% core inflation stood out to me. It suggested that energy and other supply pressures were having an unusually large effect. This did not look like an economy where every category was overheating equally. Energy prices rose 3.8% in April and accounted for more than 40% of the total monthly increase. Gasoline was 28.4% more expensive than it had been one year earlier, while airline fares were up 20.7%.
Shelter rose 0.6% during the month, and grocery prices increased 0.7%. Iran and tariffs weren’t the only forces in the report. Energy prices can move quickly, while tariffs often take longer to work their way through supply chains. A company importing metal first pays the tariff. Then it has a choice: accept a smaller profit or raise prices. The effect on customers depends on what the company decides.
I had mostly learned supply shocks through clean diagrams in economics class. There is a supply curve, it shifts left and the new equilibrium has higher prices and lower output. April made the messier part more obvious. The Fed can make a car loan less attractive. It cannot make the steel inside the car cheaper. It can slow airline demand. It cannot produce more jet fuel or reopen the Strait of Hormuz.
Raising rates could stop the first price increases from spreading into wages and other parts of the economy. But it could also weaken hiring and investment without creating a single additional barrel of oil. Cutting rates could help economic growth, but it might make it easier for companies to pass their higher costs on to customers. The Fed had a powerful tool. It just didn’t fit the problem particularly well.
A 50% tariff on imported steel doesn’t mean a car automatically becomes 50% more expensive. The tariff applies to the steel, not the entire final price. I noticed the shock most clearly at the gas station. Around Bethesda, regular gas was roughly $4.50 per gallon, compared with about $3.14 before the conflict. That difference is hard to ignore when you’re a student paying to fill up a car. The effects can be less visible too. A business facing more expensive materials may delay opening another location or hiring another worker. That could mean fewer summer jobs, even for students who never buy anything containing imported steel.
Inflation isn’t one problem with one solution. Sometimes prices rise because people are buying too much. Other times, the economy simply can’t get enough of something it needs.
The Fed can cool demand. It cannot manufacture the missing supply.