Inflation across the United States accelerated sharply in May, reaching an annual rate of 4.2%, the highest level since April 2023, according to data released Wednesday by the Labor Department. The surge was driven primarily by the ongoing energy crisis stemming from the Iran war, which has disrupted global supply chains and sent prices soaring.
The Consumer Price Index (CPI), a broad measure of goods and services, rose from 3.8% in April, exceeding economists' expectations of 4.0% as polled by FactSet. Energy prices accounted for more than 60% of the monthly increase, with gasoline prices jumping 40.5% from a year earlier.
The closure of the Strait of Hormuz has severely impacted global oil shipments, driving up costs for fuel, airfares, and other goods. While fuel prices have eased slightly in June, according to the CBS News gas and oil price tracker, that decline is not reflected in the May data.
Food prices also rose, with the cost of groceries increasing 2.7% year-over-year. Tomato prices surged 32%, lettuce jumped nearly 25%, and coffee prices rose 17.5%, continuing to strain household budgets.
Core inflation, which excludes volatile food and energy categories, rose at an annual rate of 2.9%, up slightly from 2.8% in April. Economists noted that outside the energy-related categories, there were some signs of easing.
Prices for new vehicles, household furniture, and prescription drugs fell for the first time in 14 months, suggesting that the bulk of tariff-related price increases may be behind us, according to Gregory Daco, chief economist at EY-Parthenon. However, household budgets remain under significant pressure.
Elizabeth Renter, senior economist at NerdWallet, said in an email that rising inflation is outpacing wage growth, leaving many Americans feeling powerless. A recent CBS News poll found that three-quarters of Americans say their incomes are not keeping up with inflation.
The inflation surge has upended expectations for the Federal Reserve's interest-rate path. In January, economists focused on when the Fed might cut rates, but now some analysts predict the central bank's next move could be a rate hike.
For now, Fed officials are expected to hold borrowing costs steady at their June 17 meeting, with CME Group's FedWatch tool showing a 96% likelihood of no change. Chris Zaccarelli, chief investment officer for Northlight Asset Management, warned that if inflation continues, the Fed will be in no position to cut rates, and its next move may need to be a hike.