Key facts
- US consumer prices likely rose in May, with the CPI expected to reach 4.2% year-on-year.
- Rising oil and gas prices, influenced by the Iran war and Strait of Hormuz closure, are driving inflation.
- Gasoline prices increased significantly in May, contributing to broader inflation concerns.
- Core inflation is forecast to rise, indicating persistent price pressures beyond energy.
- The Federal Reserve faces pressure to consider rate hikes instead of cuts due to elevated inflation.
- The labor market remains strong, suggesting the Fed may not need to cut rates to stimulate growth.
U.S. consumer prices likely saw their fastest pace in three years in May, primarily driven by rising energy product prices stemming from the Iran war and the closure of the Strait of Hormuz. This anticipated surge in the Consumer Price Index (CPI) is expected to reinforce the Federal Reserve's stance on maintaining current interest rates, with some officials now signaling a potential rate hike.
The Labor Department's upcoming report is projected to show a third consecutive month of strong year-on-year CPI readings, with an expected annual increase of 4.2%, up from 3.8% in April. On a monthly basis, prices are forecast to have risen 0.5%. Core inflation, excluding volatile food and energy, is also expected to show persistent pressure, rising 0.3% monthly and reaching 2.9% annually, above the Fed's 2% target.
Gasoline prices rose significantly in May due to the conflict impacting oil supply, though they have since fallen. However, higher diesel fuel costs have increased shipping expenses, potentially pushing up grocery and other prices. Despite these inflationary pressures, the labor market remains robust, with hiring increasing and the economy growing, suggesting the Fed may not need to cut rates to stimulate activity.
Wall Street investors are now anticipating a potential Fed rate hike in December, according to CME Fedwatch futures. The persistent inflation has placed new Fed Chair Kevin Warsh in a challenging position, as he previously advocated for rate cuts. While the Trump administration is not demanding further cuts, they are arguing against rate increases.