US inflation reaches 4.2% in May as energy costs jump

US consumer inflation rose to 4.2% in May, its fastest annual pace in three years, as a sharp increase in energy prices lifted household costs across the economy. The consumer price index advanced 0.5% on a seasonally adjusted monthly basis, the Bureau of Labor Statistics said Wednesday, matching the Dow Jones consensus estimate.

The annual reading was up from 3.8% in April and was the first move above 4% since April 2023. The monthly increase was 0.1 percentage point below April’s pace, according to the Bureau of Labor Statistics data cited in the report.

Core CPI, which excludes food and energy because those categories tend to move more sharply from month to month, rose 0.2% in May and 2.9% from a year earlier. The annual core figure matched the Dow Jones forecast, while the monthly gain came in below the 0.3% estimate and slowed from 0.4% in April.

Energy accounts for much of the increase

The Bureau of Labor Statistics report showed energy prices climbed 3.9% in May, taking their 12-month rise to 23.5%. That category was the main contributor to the headline acceleration. Core commodities prices, by contrast, fell 0.1% on the month, a sign that goods prices outside food and energy were not adding broad pressure in May.

Food prices increased 0.2%. Shelter costs, a major component of the CPI and a closely watched input for Federal Reserve officials, rose 0.3%, half their April increase. Shelter accounts for more than one-third of the CPI basket and was up 3.4% from a year earlier.

Other categories pointed to a mixed pass-through from energy into services. Transportation services declined 0.6%, while services excluding energy services rose 0.3% after a 0.5% gain in April. Airline fares increased 2.7%, new vehicle prices fell 0.3%, used cars and trucks edged up 0.1%, and motor vehicle insurance declined 1.7%.

Heather Long, chief economist at Navy Federal Credit Union, said Americans were being squeezed by price increases in basic categories including gasoline, food, electricity and medical care. She said an end to the war in Iran would help moderate inflation, while warning that food-price pressures may still worsen.

Fed decision in focus

The inflation data arrived one week before the Federal Open Market Committee’s scheduled June 17 rate decision. Markets broadly expected policymakers to keep rates unchanged, according to CNBC, while investors were watching for indications of how officials view the latest rise in inflation.

Market reaction was contained after the release. CNBC reported that US stock futures remained negative but moved off their lows, while Treasury yields were little changed.

Energy costs have become a larger concern for markets as the US remains involved in hostilities with Iran. CNBC reported that President Donald Trump said Iran would “pay the price” for not accepting a peace deal, adding to investor concern that higher oil prices could affect other parts of the economy.

Futures markets continued to indicate that the Fed was likely to remain on hold through much of the year, with traders pricing the next move as a possible rate increase in December, according to CNBC. New Fed Chair Kevin Warsh has said he believes rates can move lower as productivity gains linked to artificial intelligence exert a disinflationary effect on the economy.

Chris Rupkey, chief economist at Fwdbonds, said core goods inflation risks had eased for now and argued that officials in Washington would increase efforts to counter the view that the US faces a cost-of-living crisis.

This story draws on original reporting from CNBC.