The Bureau of Labor Statistics reported Wednesday that the Consumer Price Index rose at an annual rate of 4.2% in May, the highest reading in three years and the third consecutive monthly increase since the US-Israel war with Iran began in late February. The monthly CPI figure came in at 3.8% in April and 3.3% in March. Before the conflict, inflation stood at 2.4% in February.
The headline figure of 4.2% is slightly above the vintage year-over-year reading from the Federal Reserve Bank of St. Louis’s FRED database, which recorded the CPI at 3.78% as of June 10, a gap that analysts say may reflect differences in seasonal adjustment or preliminary-revision timing.
Energy costs drove the May increase, accounting for about 60% of the overall monthly rise, according to the BLS. Overall energy bills including gas and electricity were almost a quarter higher than a year earlier. The national average price of regular gasoline stood at $4.15 a gallon Wednesday, according to the BLS data cited by the BBC and the Guardian, a sharp rise from $2.98 before the Iran strikes.
Higher prices extended beyond fuel. Essential everyday expenses such as food, energy services, and clothing also increased. Stripping out volatile food and energy prices, core CPI rose 2.9% in May, the Guardian reported.
The new inflation data puts pressure on the Federal Reserve, which holds its next policy meeting next week — the first under Chair Kevin Warsh, who succeeded Jerome Powell late last year. The Fed has held its benchmark rate steady at 3.5% to 3.75% since last year. Warsh said he believes rates should be lowered, aligning himself with President Trump, who has repeatedly pressured the central bank to cut rates.
On Tuesday, Trump told reporters that he did not think US fuel prices were “very high, relatively speaking,” according to the Guardian.
Major investment banks have revised their rate forecasts. Goldman Sachs said Friday that it no longer expects the Fed to cut rates this year, predicting instead that rates will remain unchanged through 2026 and any cuts would be delayed until 2027. JPMorgan Global Research forecast that rate hikes across global central banks were on the horizon and predicted the Fed would increase rates by 2027.
“The energy price spike is now raising inflation and generating a sharp squeeze on household purchasing power that could intensify if the Middle East conflict keeps the strait of Hormuz closed,” Bruce Kasman, chief global economist at JPMorgan Chase, wrote in an April report.
Consumer sentiment has fallen to a historic low, according to University of Michigan data, after dropping for three consecutive months. A Federal Reserve Bank of New York survey released Monday found that households have become more pessimistic about inflation conditions, the labor market, and the likelihood of layoffs.
The US labor market has remained resilient. The Bureau of Labor Statistics reported June 5 that employers added 172,000 jobs in May, beating expectations, while the unemployment rate held steady at 4.3%. The strong hiring data gives the Fed room to keep rates elevated as it tries to contain inflation without tipping the economy into recession.