Prices in the United States rose at a “moderate to strong pace” in recent weeks, largely due to higher energy costs due to the Iran war, the Federal Reserve said on Wednesday.

“Districts noted that energy-related costs linked to the conflict in the Middle East were the primary driver of inflationary pressures, with increases in shipping, packaging, groceries and fertilizers,” the Fed said in its “Badge Book” survey of economic conditions in the United States.

The United States and Israel launched a war against Iran on February 28, plunging the region into turmoil as Tehran’s counterattacks hit Washington’s regional allies and virtually blocked the Strait of Hormuz.

Blocking the vital waterway – which under normal circumstances sees around a fifth of global oil and gas supplies pass through it – has sent energy prices skyrocketing and significantly disrupted supply chains.

The Fed’s Beige Book presents a national summary of information collected by each of the US central bank’s 12 districts through interviews with key business contacts, economists and other sources.

Government data last month showed the Fed’s preferred measure of inflation rose in April at the fastest annual rate since 2023.

Wednesday’s report cited business owners as suggesting that prices have not risen at a pace commensurate with non-labor inputs, suggesting companies are squeezing profit margins to maintain revenue.

High-income households continued to show elastic demand, in what economists have termed a “K-shaped economy,” where tough economic conditions cause wealthy households to maintain or increase spending while hitting poorer households harder.

“Middle-income households were described as ‘squeezing more out of life before deciding to spend each dollar,’ and lower-income consumers reported greater financial stress,” the report said.

According to the report, there was strong demand for credit cards overall, fewer retail visits and necessities.

Overall economic activity increased at a slight to moderate pace in 10 of the 12 Federal Reserve Districts, while one declined slightly and the other was unchanged.

Employment activity showed little change in 11 districts, with one showing modest growth.

“Manufacturing hiring was the strongest sector in many districts, supported by defense-related activity and growing demand for data centers,” according to expectations in line with demand driven by an explosion in war and artificial intelligence technology.

“Most districts described a low-hire, low-fire environment, with workers increasingly reluctant to change jobs due to economic uncertainty,” the Fed said.