Inflation accelerated in May to the fastest pace in more than three years as the Iran war pushed up energy prices, outstripping Americans’ pay gains.
The consumer price index climbed 0.5% from April and 4.2% from a year earlier, the most since early 2023, according to Bureau of Labor Statistics data out on Wednesday. An underlying gauge of inflation that excludes food and energy, however, rose a less-than-expected 0.2% from the prior month.
More than half of the advance in the overall CPI was due to higher energy costs, though prices in some categories like transportation services, health insurance and new vehicles fell. That offers cold comfort for consumers who are already seeing price hikes eat into their paychecks.
Even if there’s a resolution to the conflict soon, economists see more price increases on the horizon, which could prompt Federal Reserve officials to consider an interest-rate increase this year. Beyond the initial energy shock, disruptions to fertilizer markets may eventually lead to higher grocery bills, while rising transportation costs could boost prices for all kinds of consumer goods.
S&P 500 futures pared losses after the release, while Treasury yields were little changed.
The CPI report showed prices of household essentials, aside from gasoline, rose at a more muted pace in May. Grocery prices rose 0.1%, while energy services costs, a category which includes utilities prices like electricity and natural gas, also advanced at a slower pace. Gasoline climbed 7%.
A separate report on Wednesday that combines the inflation figures with recent wage data showed that real average hourly earnings fell 0.7% from a year earlier, the biggest drop in more than three years.
The combination of higher prices and weaker pay gains is putting more stress on household budgets at a time when consumer sentiment is already at record lows, and will likely be front and center in November’s midterm elections. President Donald Trump’s approval ratings have slumped as Americans have soured on his handling of the economy, which he had previously counted as an area of strength.
Wednesday’s report showed airfares rose 2.7% in May, and delivery services costs posted a firm advance for a third month. Those are two categories economists have been watching to assess whether higher energy prices are starting to filter into core inflation.
Prices for goods excluding food and energy, another category which may see a boost from the impact of the war, fell 0.1%, the most in more than a year. Economists have also been keeping an eye on goods prices for signs as to whether retailers are still passing on costs from Trump’s tariffs.
While used-car prices rose slightly, prices for new vehicles fell for a second month. Apparel prices continued to rise, though at a slower pace than in the last few months.
A deceleration in rental inflation helped offset increases in other categories after it was boosted in April by a measurement quirk related to last year’s government shutdown. Owners’ equivalent rent, the largest component of the CPI, rose 0.3%.
Saraiva writes for Bloomberg.