• The new CPI report showed annual inflation sped up to 3.8% in April, the highest rate since 2023.
• Higher energy prices due to the Iran war are affecting consumer prices.
• Prices at the pump are having unequal effects on consumers, depending on their household income.

US annual inflation accelerated more than expected, with the consumer price index rising 3.8% in April from a year ago. Economists expected a 3.7% increase, and it's the highest inflation rate since 2023.

Stephen Juneau, senior economist in BofA Global Research, told Business Insider before March's reading last month that sustained higher inflation would lead to cooler real income growth and less purchasing power.

AAA data showed gas prices have climbed to around $4.50 on average from just under $3 at the end of February when the Iran war started. Prices at the pump are likely leading lower-income households to modify their gas consumption, while higher-income households are mostly trucking along.

"Higher-income households have reduced real gas consumption only modestly and increased gasoline spending considerably compared with 2023," a Federal Reserve Bank of New York post said, based on spending data through March. "In contrast, lower-income households increased spending by much less and decreased real consumption by much more, potentially by carpooling or substituting to public transit where available."

Gas prices are also likely taking a toll on people's feelings about the economy. The consumer sentiment index dropped to a record low of 48.2 in May, based on preliminary data from the University of Michigan.

"Middle East developments are unlikely to meaningfully boost sentiment until supply disruptions have been fully resolved and energy prices fall," Joanne Hsu, the surveys of consumers director, said.

CME FedWatch, which shows traders' expectations of the Fed's decision, showed a more than 90% chance that interest rates will be held steady at the next scheduled meeting in mid-June, which will be the first under a new Fed chair. Kevin Warsh is expected to be confirmed as Jerome Powell's successor.

"The Federal Reserve exists for one fundamental purpose: to foster the economic conditions in which American families and businesses can thrive — stable prices, a strong job market, and a financial system they can depend on," Powell said at the Federal Open Market Committee press conference in April. "Every decision we make — whether about interest rates, or regulatory and supervisory matters, or other issues — is made in service of that purpose."

This is a developing story. Please check back for updates.