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* Consumer price index rises 0.5% in May, in line with forecasts
* Consumer prices increase by 4.2% year-on-year, the largest increase in three years
* Core CPI rises 0.2% as auto insurance prices record biggest decline since 2020
by Lucia Mutikani
U.S. consumer price inflation rose at its fastest pace in three years in May, boosted by soaring energy prices amid the Middle East conflict, giving the Federal Reserve more reason to hold rates steady of interest unchanged until 2027.
The third consecutive increase in the consumer price index, published Wednesday by the Ministry of Labor, highlighted the growing pressure weighing on households, who are drawing more and more from their savings to finance their expenses.
In May, inflation eroded wages for the second month in a row, which could weigh on overall economic growth. The soaring cost of living poses a political handicap for President Donald Trump and his Republican Party, which seeks to maintain control of Congress during the midterm elections in November. Trump won the 2024 presidential election largely on his promise to reduce inflation, but has seen his popularity plummet as frustration grows with his handling of the economy.
Asked about rising price pressures, Trump told reporters: “I love inflation,” adding that “it’s going to drop like a rock” when the US-led war on Iran ends.
The consumer price index rose 4.2% in the 12 months to May, the largest increase since April 2023, the Labor Department’s Bureau of Labor Statistics said. The CPI rose 3.8% year-on-year in April and 3.3% in March. Prices rose 0.5% over the month after climbing 0.6% in April. The rise in inflation was in line with economists’ forecasts.
The US central bank uses price indices for personal consumption expenditures for its 2% inflation target. All inflation indicators are well above the Fed’s target. Real average hourly earnings fell 0.7% in the 12 months to May, following a 0.3% decline in April.
“Americans are being financially strained by inflation,” said Heather Long, chief economist at Navy Federal Credit Union. “It’s not just negative sentiment about the current economy, but real financial pressures, particularly on middle-class and low-income households.”
A 3.9% increase in the price of energy products accounted for more than 60% of the increase in the monthly CPI. Energy prices rose 3.8% in April. They jumped 23.5% in the 12 months to May. Gasoline prices increased 7.0% during the month and are up 40.5% from last year. Pump prices have fallen in recent weeks thanks to falling oil prices, sparking cautious optimism among economists that May will mark the peak of CPI inflation.
But the United States and Iran engaged in retaliatory strikes on Tuesday, with Donald Trump declaring on Wednesday that Tehran had taken too long to negotiate an agreement and that he would now “have to pay the price”.
Last month’s inflation was also fueled by rising rents. While the rise in food prices has slowed after accelerating in April, upside risks remain as the conflict, now in its fourth month, has driven up the cost of fertilizer.
Food prices increased slightly by 0.1%, as increases in the prices of soft drinks, cereals and baked goods, and fruits and vegetables were partially offset by lower costs of meat and dairy products.
Stocks on Wall Street fell. The dollar remained stable against a basket of currencies. Yields on US Treasury bonds have increased.
THE BAR IS SET HIGH FOR AN INCREASE IN RATES
Following last week’s announcement that the economy had recorded a third straight month of better-than-expected job growth in May, financial markets began pricing in a rate hike. The CPI report, however, suggested that the oil price shock was not yet rippling through the wider economy and remained mainly confined to the transport sector. There were also signs that the impact of tariffs on imports was fading.
Economists continued to believe that the bar remained high for tightening monetary policy. They expected the Fed to keep its benchmark overnight interest rate in a range of 3.50% to 3.75% at its meeting next week, but to abandon its dovish stance.
Excluding volatile components such as food and energy, the CPI increased by 2.9% year-on-year in May, after an increase of 2.8% in April.
The so-called “basic” CPI increased by 0.2% over the month, after an increase of 0.4% in April. This slowdown is explained by a 1.7% drop in car insurance premiums, the largest drop since October 2020. Economists estimated that this drop was in contradiction with the reality of an increase in car insurance premiums. This decline is not expected to be reflected in the core PCE inflation measure, which uses the component from the producer price index report.
In addition, while the boom in spending on artificial intelligence drives up the prices of computers and software, these have a lower weight in the basic CPI basket. This weight is greater in the core PCE inflation basket.
Prices of furnishings and household supplies fell while those of clothing rose moderately, suggesting that the rise in inflation due to import duties was coming to an end. Prices of new vehicles fell and the cost of used cars and trucks increased slightly by 0.1%. Prices of underlying goods fell 0.1%.
Rents increased by 0.4%, with the equivalent rent for owners of their main residence increasing by 0.3%. Rents increased by 0.5% in April, supported by a one-off adjustment following the closure of public services last year which prevented data collection. Economists expected these effects to fade in May.
Air fares rose 2.7% after a 2.8% increase in April, reflecting the rise in kerosene prices. They jumped 26.7% year-on-year. The cost of health care increased by 0.5%, driven by dental and hospital services. The overall cost of services, excluding energy, increased by 0.3% after accelerating by 0.5% in April.
Based on CPI data, economists estimated that PCE inflation rose 0.4% in May, which would match April’s rise and translate into an annual increase of 4.0%. PCE inflation rose 3.8% in the 12 months to April. Estimates for core PCE inflation for May were between 0.3% and 0.4% for the month. Core inflation was expected to increase by 3.3% year-on-year.
“If we don’t see a moderation in energy prices soon, it’s only a matter of time before we see more visible impacts on other categories of goods and services as well as inflation expectations,” said Scott Anderson, chief U.S. economist at BMO Capital Markets. “The possibility of future rate hikes remains very relevant.”
