Key facts
- US inflation reached its highest level in three years in May.
- Consumer prices rose 4.2% year-over-year in May, up from 3.8% in April.
- The energy index increased by 3.9% in May, accounting for over 60% of the monthly rise.
- Core inflation, excluding food and energy, rose 2.9% year-over-year.
- Federal Reserve officials are now contemplating interest rate hikes instead of cuts.
Inflation in the United States accelerated to its highest pace in three years in May, primarily driven by a significant increase in energy prices. The Consumer Price Index (CPI) for All Urban Consumers (CPI-U) rose 0.5% on a seasonally adjusted basis in May, following a 0.6% increase in April. Annually, the all items index climbed 4.2% before seasonal adjustment, a notable increase from the 3.8% rise seen in April.
The energy index was a major contributor, surging 3.9% in May and accounting for over 60% of the monthly all items increase. This surge was largely attributed to the closure of the Strait of Hormuz by Iran, which disrupted oil supply. Gasoline prices, a key component of the energy index, rose from an average of $4.04 in mid-April to $4.49 in mid-May, though they have since fallen back to $4.16.
Core prices, which exclude volatile food and energy categories, showed a more moderate increase. The index for all items less food and energy rose 0.2% in May, bringing the annual increase to 2.9%, up from 2.8% in April. The food index increased 0.2% over the month, with food at home rising 0.1% and food away from home increasing 0.3%.
The persistent inflation has shifted the outlook for Federal Reserve policymakers. While some had anticipated rate cuts this year, many now expect the Fed's next move to be a rate hike. This stance is supported by improving job market data and continued economic growth, suggesting the Fed's current rates are not overly restrictive. Investors are pricing in a potential rate hike in December, according to futures markets. Higher inflation has placed new Fed Chair Kevin Warsh in a challenging position, as he replaces Jerome Powell, whom President Trump had criticized for not lowering rates faster.