US inflation jumped 4.2% in May, marking the third consecutive monthly increase since the start of the Iran war and reaching a three-year high, as Americans continue to face steep oil prices. Prices have risen sharply over the past several months, climbing 3.3% in March and 3.8% in April. In February, before the conflict began, inflation stood at 2.4%.
Energy prices were once again the primary driver of the consumer price index increase, according to new data from the Bureau of Labor Statistics, accounting for 60% of the overall monthly gains. Although prices at the pump are slightly lower than a month ago, they remain about $1 per gallon higher than a year ago. Other essential everyday expenses, such as food, energy services, and clothing, also increased. Excluding volatile energy and food prices, core CPI rose 2.9%.
Since the beginning of the US-Israel war with Iran, inflation has hit its highest levels since 2023, though it remains well below the peaks recorded in 2022, when inflation reached 9%. Higher prices have dampened Americans' expectations of their financial outlook. According to a survey released on Monday from the Federal Reserve Bank of New York, households have become more pessimistic about inflation, the labor market, finding a job, and the potential for layoffs. Consumer sentiment has also plummeted to a historic low, according to data from the University of Michigan, after falling for three consecutive months.
The new inflation data puts pressure on officials with the US Federal Reserve, who are meeting for the first time next week under the central bank's new chair, Kevin Warsh. The Fed has voted to maintain interest rates since the end of last year. Warsh has stated that he believes rates, which currently stand at 3.5% to 3.75%, should be lowered, aligning himself with Donald Trump, who has spent the last year trying to pressure the central bank into reducing rates.
Even though prices are rising, the president is unlikely to be deterred from calling for rate cuts. On Tuesday, Trump told reporters that he did not think US fuel prices were "very high, relatively speaking." The Fed typically decreases rates to address high unemployment, at the risk of raising prices. The US job market has remained strong, with employers adding a surprising 172,000 jobs in May while the country's unemployment rate held steady at 4.3%.
Goldman Sachs announced on Friday that it no longer believes the Fed will cut rates this year, instead predicting that the central bank will keep rates unchanged throughout 2026 and delay any cuts until next year. JP Morgan Global Research forecast that rate hikes across global central banks are on the horizon and predicted that the Fed would increase rates by 2027. "Two recent developments are upending the debate about inflation inertia and the monetary policy path," wrote Bruce Kasman, chief global economist at JPMorgan Chase, in the April report. "The energy price spike is now raising inflation and generating a sharp squeeze on household purchasing power that could intensify if the Middle East conflict keeps the strait of Hormuz closed."
