The economic fallout from the Strait of Hormuz disruption continues to hit the U.S. economy, driving inflation higher and slowing growth as Wall Street questions whether the Federal Reserve's next move is up, not down.

American consumers are paying the most for goods and services in nearly three years. Consider the April Personal Consumption Expenditures report released Thursday. Headline inflation is at 3.8% year-over-year. That's the hottest reading since 2023.

A separate release revised first-quarter gross domestic product growth down to a 1.6% annualized pace from the initial 2.0% estimate.

Accelerating prices alongside decelerating growth is the macro signature of the Iran war energy shock working through the system.

Despite the macro shock, the U.S. stock market continues to break records. The S&P 500 — tracked by the SPDR S&P 500 ETF Trust SPY — surpassed 7,550 points for the first time ever on Friday.

The question is whether Wall Street is ignoring the macro reality or already pricing a Hormuz reopening that drains the inflation out of it.

Why Q1 2026 Growth Was Revised Down

Oxford Economics chief U.S. economist Michael Pearce said a slowdown in profit growth and a larger-than-expected decline in stockbuilding primarily drove the downward revision to GDP.

New data showed services spending, particularly on medical services, slowed during the quarter, while business inventories fell by more than previously estimated.

With inventory levels now lean, Pearce still expects a wave of restocking to materialize, but cautioned that the impact of the war and the related jump in uncertainty and supply-chain stress means that rebound may not arrive until late this year or early 2027.

The Consumer Is Stressed, But Not Buckling

The April income and spending data revealed a consumer increasingly under pressure.

Personal income fell 0.1% on the month, distorted by one-time farm payments that had boosted March, while real disposable income dropped 0.5%.

Most strikingly, the personal saving rate fell to just 2.6%, the lowest since June 2022, as households drew down reserves to keep spending.

"We expect consumer spending to expand at a sub-2% pace for most of this year, as the fiscal stimulus from higher refunds wears off and the drag from higher gasoline prices mounts," Pearce said.

"The downward revisions to consumer spending in Q1 and the slowdown in April point to a consumer coming under stress, but not one that is about to buckle," he added.

Inflation Hits The Fed

The April data have hardened the resolve of the Federal Reserve's inflation hawks, who increasingly view the Strait of Hormuz energy shock as a threat to the central bank's credibility rather than a one-off to look through.

Minneapolis Fed President Neel Kashkari told CNBC on Wednesday that bringing inflation down remains his top priority, warning consumer prices are still "much too high."

He stressed a balanced approach to the dual mandate but made clear where the weight sits.

"We need to pay attention to both sides, but the labor market is in decent shape right now, while inflation is simply much too high," Kashkari said.

He warned that the longer inflation stays elevated, the greater the risk that consumer expectations become unanchored — which would force the Fed to respond more aggressively.

Fed Governor Lisa Cook struck a sharper note. Inflation, she said, is clearly moving in the wrong direction. If expected disinflation does not materialize in a timely manner, rates will rise.

Fed Vice Chair Philip Jefferson indicated that disinflation had stalled over the preceding year because of tariffs, with inflation now moving notably higher recently on energy costs.

While he expects price pressures to ease later this year as the tariff and energy effects wane, he said "risks around my inflation outlook are tilted to the upside."

Can AI Help? Musalem Isn't Counting On It

St. Louis Fed President Alberto Musalem is cautioning against betting that an AI-driven productivity boom will solve the inflation problem.

"It would be risky to rely on the prospect of higher productivity growth in the future to solve our inflation problem today," he said at the Reykjavík Economic Conference on Friday, invoking the 1970s — when the Fed wrongly blamed inflation on oil shocks and overestimated growth potential — as a warning against complacency.

Together, the three point to a central bank bracing for a stickier energy shock, not preparing rate cuts — the scenario that would keep rates higher for longer, or in the tail case, force a hike.

The Bottom Line

The April data crystallize the bind facing the Fed under new Chair Kevin Warsh.

Growth is slowing, consumers are dipping into savings, and inflation, driven by the Hormuz shock, is sticky enough that even a rate hike looks increasingly likely.

Notably, even with rates pinned higher for longer, Goldman Sachs raised its year-end S&P 500 target to 8,000 from 7,600 this week, citing a solid earnings outlook — a reminder that equities are pricing resilience the bond market is not.

Either way, the Strait of Hormuz is quietly reshaping the U.S. economy: higher prices, slower growth, and a central bank with nowhere comfortable to turn.