US consumer inflation rose at its fastest pace in three years in May, as surging oil prices from tensions with Iran pressured global energy markets ahead of next week's Federal Reserve policy meeting.
According to data from the Bureau of Labor Statistics, the consumer price index (CPI) climbed 0.5% in May from the previous month, following a 0.6% rise in April. On an annual basis, CPI was up 4.2%.
The increase was largely driven by energy prices, which rose 3.9% in May after a 3.8% gain the month before. Gasoline prices jumped 7% month-over-month and were more than 40% higher than a year ago.
The American Automobile Association (AAA) reported that the national average for a gallon of gas stood at $4.15 (about $1.10 per liter). On February 28, before the US and Israel first struck Iran, gas was $2.98 per gallon ($0.79 per liter).
Global oil prices continued to climb. Brent crude futures rose $1.45 (1.6%) to $92.90 a barrel in Wednesday morning trading. West Texas Intermediate crude gained $1.80 (2%) to $90 a barrel, after touching a session high of $90.42.
Inflation also got a lift from a 0.3% increase in shelter costs and a 0.3% rise in food prices, though food inflation eased from 0.6% in April and 0.5% in March.
Despite rising inflation, real wages for US workers failed to grow for a second straight month. Real wage growth fell 0.1% in May.
Alex Jaquez, former member of the White House National Economic Council under former President Joe Biden, said: “High prices are here to stay. This month's CPI report offers no relief for working families who are forced to tighten their spending.”
Heather Long, chief economist at Navy Federal Credit Union, noted: “Americans are being squeezed financially by inflation. This is no longer just about negative sentiment toward the economy; real financial pressure is mounting, especially for middle- and low-income households.”
Pressure on the Fed
The inflation surge comes as the likelihood of a Fed rate hike grows. The central bank will hold its first policy meeting under Chair Kevin Warsh, who succeeded Jerome Powell last month.
The CME Fed Watch tool predicts rates will hold steady at next week's meeting but indicates a rising chance of hikes in coming months. Specifically, there is a 96% probability that rates remain at 3.5%-3.75% in June. By the October meeting, however, there is nearly a 38% chance of a hike to 3.75%-4% and an 8% chance of an increase to 4%-4.25%.
Goldman Sachs forecasts no rate cuts until mid- or late 2027.
Market reaction
US stock markets fell as the inflation data stoked rate-hike fears. The S&P 500 dropped 1%, the Dow Jones lost 1.3%, and the Nasdaq declined 1.4% in midday trading Wednesday.
Gold prices also came under pressure. Spot gold slid 2.6% to $4,151.86 per ounce, its lowest since March 23.
Aleksandar Tomic, associate dean for strategy, innovation, and technology at Boston University, commented: “We're talking about the possibility of rate hikes, and that's about controlling inflation, which pushes gold prices down.”
