Inflation accelerated in May as rising energy costs became painful for consumers, but underlying pressures were less strong.
The Consumer Price Index, a broad gauge of the cost of goods and services across the U.S. economy, rose a seasonally adjusted 0.5% this month, bringing the annual inflation rate to 4.2%, the Bureau of Labor Statistics reported Wednesday. Both numbers were in line with the Dow Jones Consensus, although the monthly numbers were 0.1 percentage points lower than April’s numbers.
The inflation rate exceeded 4% for the first time in three years, meeting expectations amid concerns about how high energy prices will affect the economy. This level is the highest since April 2023 and exceeded April’s 3.8%.
But excluding volatile food and energy prices, the so-called core CPI rose 0.2% in the month and 2.9% year-on-year. Although the annual rate was in line with expectations, the monthly rate of increase was lower than the expected 0.3% increase and was also lower than the 0.4% increase in April.
“Americans are under financial stress as inflation returns to a three-year high,” said Heather Long, chief economist at Navy Federal Credit Union. “Many Americans are frustrated by the fact that many of the essentials are now more expensive. Gas, food, electricity, and health care are all obvious problems with inflation rates exceeding 3%. Ending the Iran war will help ease inflation, but the worst of it – higher food prices – is likely still to come.”
The report comes at a sensitive time for markets and policymakers, as Federal Reserve officials consider their next move on interest rates. Investors will be looking for signs of how worried regulators are about soaring inflation, although most expect the rate-setting Federal Open Market Committee to remain on hold when its decision is announced on June 17.
As the United States becomes embroiled in a hostile relationship with Iran, there are growing concerns that rising oil prices could spill over into other energy-sensitive parts of the economy. Markets were jolted again on Wednesday after President Donald Trump warned that Iran “will pay a price” for not accepting the peace deal.
Stock market futures remained in negative territory, but after the CPI was announced, they fell to a low and US Treasury yields remained flat.
Much of the spike in inflation was due to a 3.9% rise in energy prices, taking the 12-month rise to 23.5%, the report said. In fact, core commodity prices fell 0.1% from the same month, indicating that tariff pressure is easing.
“Economic officials in Washington will step up their efforts to tell Americans there is no cost-of-living crisis,” said Chris Rupkey, chief economist at Forwardbonds. “After all, the sky is not falling and inflation risks for core consumer goods have receded for now.”
Food prices accelerated by only 0.2%, and housing costs, a key input for Fed policy, rose 0.3%, half of April’s growth. Shelters, which account for more than a third of the weight in the CPI, rose by 3.4% annually.
In other regions, transit services decreased by 0.6%. This is a potential indicator that high energy costs have not trickled down to other areas. Similarly, services excluding energy services, which is an indicator of whether the soaring oil prices are spreading, rose 0.3%, following a 0.5% rise in April.
New car prices fell 0.3%, while used cars and trucks rose 0.1%. However, airfares rose 2.7%, a clearer indication of energy pass-through, while auto insurance fell 1.7%.
The report sent futures markets suggesting the Fed is likely to keep policy on hold through much of the year, with traders pricing in the possibility that its next move will be a rate hike in December. New Federal Reserve Chairman Kevin Warsh has said he believes that productivity gains from artificial intelligence will have a disinflationary effect on the economy, potentially leading to lower interest rates.
