Cook the bacon in a large pot over medium heat until crispy. Remove and let drain on paper towels, leaving some rendered fat in the pot.
In the same pot, add butter or olive oil along with diced onion and sliced carrots. Sauté until tender and fragrant, about five minutes.
Pour in chicken broth along with salt, pepper, garlic powder, dried thyme, and red chili flakes. Bring to a simmer while stirring occasionally.
Add the gnocchi directly into the pot and cook according to package instructions until they float to the top, usually around three minutes.
Lower the heat and stir in heavy cream or half-and-half gradually followed by grated cheddar cheese until melted through completely.
Add crumbled bacon back into the soup before serving for added crunch and flavor contrast; serve hot while garnished with extra cheese if desired!