Gas prices have hit new four-year highs nationwide, with Friday’s national average coming in at $4.42. Residents in California are paying $6 or more per gallon.
The surge in gas prices could be the start of “demand destruction” and lead to fewer chances of a Federal Rate cut in 2026 and could even mean a rate increase, according to one expert.
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Federal Reserve Calls Out Energy Prices
This week’s Federal Reserve meeting and comments saw rates remain steady in what was the final meeting led by outgoing Fed Chair Jerome Powell.
While keeping rates unchanged, the Fed warned that “inflation is elevated,” and referenced the “increase in global energy prices.” These new comments come after the Fed previously said inflation was “somewhat elevated.”
“Developments in the Middle East are contributing to a higher level of uncertainty about the economic outlook,” the Federal Reserve Committee said.
The higher energy prices have indicators used by the Federal Reserve for inflation showing that the country is even further from a 2% target. This typically leads to rates being kept the same or raised.
Rising Gas Prices
Friday’s national average of $4.42 per gallon, as tracked by GasBuddy, is the highest in four years. Midwest states are seeing big surges, with some states seeing the cost per gallon go up more than $1 in a week. This comes with rising oil prices from the Middle East tension and refinery issues, leading to a perfect storm now being felt even more by consumers at the gas pump.
In California, gas prices are over $6 in some locations, according to a report from Politico, citing AAA data.
“Every American who fills up their tank this week, buys groceries, or books a flight is paying Donald Trump’s Iran war tax,” California Gov. Gavin Newsom said Thursday on the rising gas prices.
California is nearing all-time highs for gas prices, which were previously set in June 2022 with a state average of $6.44.
Rate Cut Off Table, Rate Increase Back On?
Investors came into 2026 with expectations for the Federal Reserve to cut rates. Instead, inflation is pushing higher, and new concerns over gas prices are creating worry about what comes next, with one expert saying that a rate increase is now more likely.
“Given the supply shock and the probability the war will not be wrapped up soon, I think that investors have not properly priced in the risk of a rate hike as soon as the June meeting,” RSM Chief Economist Joseph Brusuelas tweeted this week.
Brusuelas is calling this an example of demand destruction and warning that it could get worse with the Strait of Hormuz closure and blockade lasting longer than expected.
“Time is not the ally of the American economy,” Brusuelas said, as reported by CNN.
The economist warns that energy touches every sector, every industry and every household in America, causing a huge chain reaction. Brusuelas says the chain reaction could start with oil prices spiking, then confidence sinks, consumers spend less on big purchases, businesses get hurt and stop hiring or lay employees off, then the Federal Reserve raises rates.
A year that was thought to have the Fed cutting rates has now completely reversed course, and the call to raise rates that would have been viewed as crazy at the start of 2026 is starting to catch on with more economists, the longer the Middle East battles wage on.
Image via Shutterstock/ Jeff McCollough
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