US Inflation Accelerates in May Amid Rising Energy Costs

Inflation accelerated in May as rising energy costs contributed to pain for consumers, though underlying pressures were less intense.

The consumer price index, a broad gauge of goods and services costs across the U.S. economy, rose at a seasonally adjusted 0.5% for the month, putting the annual inflation rate at 4.2%, the Bureau of Labor Statistics reported Wednesday. Both numbers were in line with the Dow Jones consensus though the monthly number was 0.1 percentage point below the April reading.

Inflation climbed above 4% for the first time in three years, though the increase met expectations amid concerns over how much the surge in energy prices would impact the economy. The level was the highest since April 2023 and above the 3.8% reading from April.

However, stripping out volatile food and energy prices, the so-called core CPI accelerated 0.2% for the month and 2.9% from a year ago. While the annual rate was in line with the forecast, the monthly gain was below the 0.3% estimate and less than the 0.4% April increase.

"Americans are getting squeezed financially by inflation that's back at a 3-year high," said Heather Long, chief economist at Navy Federal Credit Union. "The frustration for many Americans is that so many of the basics are up in price right now -- gas, food, electricity, and medical care are all clear pain points that are above 3% inflation. Ending the war in Iran will help to moderate inflation, but the worst is likely still to come for rising food prices."

The report arrives at a sensitive time for markets and policymakers as Federal Reserve officials contemplate their next move on interest rates. Markets largely expect the rate-setting Federal Open Market Committee to remain on hold when the decision is released June 17, but investors will be looking for signs of how concerned officials are over the inflation surge.

With the U.S. caught in ongoing hostilities with Iran, concerns are rising that the surge in oil prices could spread to other energy-sensitive parts of the economy. Markets were rattled again Wednesday when President Donald Trump warned that Iran will "pay the price" for not taking a peace deal.

Stock market futures held in negative territory but were off their lows after the CPI release while Treasury yields were flat.

The report indicated that much of the inflation surge came from a 3.9% jump in energy prices, putting the 12-month increase at 23.5%. Core commodities prices actually posted a 0.1% decline on the month, indicating muted tariff pressures.

"Washington economic officials are going to redouble their efforts to tell Americans there isn't a cost-of-living crisis," said Chris Rupkey, chief economist at Fwdbonds. "The sky isn't falling after all and the inflation risks for core consumer goods are in retreat for now."

Food accelerated just 0.2% and shelter costs, a key input for Fed policy, rose 0.3%, half the gain of April. Shelter, which makes up more than one-third of the CPI weighting, rose 3.4% annually.

Elsewhere, transportation services fell 0.6%, a potential indicator that high energy costs were not filtering into other areas. Similarly, services less energy services, also an indicator of whether higher oil costs were bleeding through, increased 0.3% after rising 0.5% in April.

New vehicle costs declined 0.3% and used cars and trucks nudged up 0.1%. However, airline fares rose 2.7%, a clearer indication of energy pass-through, while motor vehicle insurance declined 1.7%.

Following the report, futures markets indicated that the Fed is still likely to stay on hold through much of the year, with traders pricing in the likelihood that the next move will be a hike in December. New Fed Chair Kevin Warsh has indicated he thinks rates can go lower as productivity gains from artificial intelligence will have a disinflationary impact on the economy.