Inflation shot past 4% in May for the first time in three years as higher energy costs amid the war in Iran weighed on prices – likely keeping the Federal Reserve on hold next week when it comes to interest rates.
The Consumer Price Index rose 4.2% in May over the past 12 months – heating up from 3.8% in April as energy costs continued to soar, the Bureau of Labor Statistics said Wednesday.
The Fed is likely to pay attention to the core CPI figure, which excludes volatile food and energy prices – thus giving a better picture of the economy’s resilience amid temporary energy supply disruptions.
Core CPI hit 2.9% in May over the past 12 months, rising 0.2% over the month – indicating higher energy costs are seeping into the broader economy, raising prices for consumer goods and services like food and airfare.
“Once consumer prices rise, it takes time for this trend to reverse. The road back to an inflation rate near the Fed’s 2% target will not be immediate [and] is becoming more and more of a fantasy,” Skyler Weinand, chief investment officer at Regan Capital, said in a note Wednesday.
“Rising oil prices are to blame for this inflation, but tariffs are also inflationary and everyday things like food and healthcare costs are reaching unsustainable levels.”
A robust jobs report released last week, which showed US employers added 172,000 jobs in May, makes central bankers even less likely to slash interest rates at their meeting next week.
More than 98% of traders expect the Fed to hold rates in the current 3.5% to 3.75% range at their June 17 meeting, according to CME FedWatch, which tracks 30-Day Fed Funds futures prices.
As in previous months since the US and Israel’s war with Iran began in February, energy accounted for the largest driver of inflation in May – with prices rising 3.9% over the month.
Gasoline prices jumped 7% in May – up a whopping 40.5% over the past 12 months, as the Strait of Hormuz, a vital maritime route for global energy supplies, remained largely blockaded.
Airlines fares rose 2.7% in May – up 26.7% over the past 12 months – as jet fuel costs soared. Fuel is typically among the largest operating expenses for airlines, and has been an especially painful point for European airlines, which rely largely on imports.
In a bright spot for the economy, food prices jumped only 0.2% in May – less than many analysts had feared.
Higher fuel costs are typically quick to seep into food prices, since groceries need to be transported by heavy trucks that run on diesel. However, food prices are still up 3.1% over the year.
Members of the Trump administration have tried to assuage Americans as consumer sentiment has dropped to record lows, saying prices will be quick to come down once the war is resolved and the strait in the Persian Gulf is reopened.
Some analysts have warned that even if the war ends soon, prices could take time to normalize – especially following damages to Middle Eastern energy facilities, which will keep supply lower for longer.