Inflation accelerated in May as rising energy costs hurt consumers, although underlying pressures were not strong.
The consumer price index, a broad gauge of the cost of goods and services across the US economy, rose a seasonally adjusted 0.5% in the month, putting the inflation rate at 4.2% for the year, the Bureau of Labor Statistics reported on Wednesday. Both numbers were in line with the Dow Jones consensus although the monthly number was 0.1 percent below April’s reading.
Inflation rose above 4% for the first time in three years, although the rise met expectations amid concerns about how much the rise in energy prices will affect the economy. The rate was the highest since April 2023 and above the 3.8% reading from April.
However, excluding food and energy prices, the so-called core CPI accelerated by 0.2% in the month and 2.9% from last year. While the annual rate was in line with forecasts, the monthly gain was below the average of 0.3% and below April’s increase of 0.4%.
“Americans are already under financial pressure with inflation at a 3-year high,” said Heather Long, chief economist at Navy Federal Credit Union. “The frustration of many Americans is that many basic things are going up in price right now – gas, food, electricity, and medical care are all clear pain points above 3% inflation. Ending the war in Iran will help reduce inflation, but the worst is yet to come because of rising food prices.”
The report comes at a critical time for markets and policymakers as Federal Reserve officials ponder their continued interest rate hike. Markets are widely expecting the Federal Open Market Committee’s rate-setting policy to remain on hold when a decision is issued on June 17, but investors will be looking for signs of how worried officials are about inflation.
With the US caught in the ongoing war with Iran, there is growing concern that rising oil prices could spread to other energy-sensitive parts of the economy. Markets rallied again on Wednesday when President Donald Trump warned that Iran would “pay a price” for not accepting the peace deal.
Stock market futures were held in the negative but eased after the CPI release while Treasury yields were low.
The report said the increase in inflation came from a 3.9% increase in electricity prices, putting the 12-month increase at 23.5%. Core commodity prices actually posted a 0.1% decline on the month, reflecting muted tax pressure.
“Economic officials in Washington will redouble their efforts to tell the American people that there is no cost of living problem,” said Chris Rupkey, chief economist at Fwdbonds. “The sky is not falling after all and the risk of inflation in key consumer goods is currently receding.”
Food accelerated just 0.2% and housing costs, a key input for Fed policy, rose 0.3%, part of April’s gain. Shelter, which makes up more than one-third of the weight of the CPI, increased by 3.4% annually.
Elsewhere, transport services fell by 0.6%, a possible indication that higher energy costs are not filtering down to other areas. Similarly, small energy services, an indicator that higher oil costs are bleeding, rose 0.3% after rising 0.5% in April.
Prices for new cars fell 0.3% and used cars and trucks rose 0.1%. However, air fares increased by 2.7%, a clear indication of overcapacity, while motor insurance fell by 1.7%.
After the report, futures markets indicated that the Fed may remain on hold for most of the year, with traders pricing in the possibility that the next move will be a hike in December. New Fed Chairman Kevin Warsh has indicated that he thinks rates could fall as productivity gains from artificial intelligence will have a negative impact on the economy.
