US inflation climbed to a fresh three-year high in May, driven largely by rising energy prices linked to global supply disruptions following the Iran conflict, according to official data released on Wednesday.The Consumer Price Index (CPI) rose 4.2% in May compared to a year earlier, up from 3.8% in April, the US labour department said.It marked the third straight monthly increase and the highest level since April 2023.On a monthly basis, prices increased 0.5%, following gains of 0.6% in April and 0.9% in March.The rise has added pressure on the Federal Reserve, which targets 2% inflation, and is also seen as a political challenge for the Trump administration ahead of upcoming midterm elections.
Energy shock drives price rise
Much of the inflation spike was linked to higher energy costs.Gasoline and broader fuel prices surged after tensions in the Middle East disrupted oil flows, particularly following Iran’s reported closure of the Strait of Hormuz, a key global shipping route carrying about a fifth of the world’s oil.Energy prices rose 23.5% year-on-year in May, while gasoline prices jumped 40.5%. Grocery prices also rose 2.7% compared to a year earlier, adding to household pressure.According to news agency AP, price increases were relatively more moderate outside energy, suggesting inflation has not yet broadly spread across the economy.Gas prices have recently eased, which could help cool inflation in upcoming readings.
Core inflation shows mixed signals
Excluding food and energy, so-called core inflation rose 0.2% month-on-month in May, down from 0.4% in April. On a yearly basis, core CPI increased 2.9%, slightly higher than 2.8% in April, as per AP and AFP.Several categories still recorded price increases, including clothing, airline fares and electricity.Airline fares jumped 2.7% in May and are nearly 27% higher year-on-year.
Fed outlook and market reaction
The inflation trend has complicated expectations for US monetary policy. Markets are now pricing in the possibility of rate hikes later in the year, even as the Federal Reserve prepares for its upcoming policy meeting.Stubborn inflation has shifted expectations among policymakers, with some suggesting that rates may need to remain elevated or even rise further to control price pressures.Despite inflation, the US economy continues to show resilience, with steady job growth and ongoing expansion, which reduces immediate pressure on the Fed to cut rates.President Donald Trump has argued that the price shock from energy markets will be temporary and linked to geopolitical tensions, with expectations that a peace deal could stabilise markets.The inflation surge comes at a politically sensitive time, with high living costs remaining a central issue for US voters ahead of the November midterm elections.Rising fuel costs have also pushed up shipping expenses, with logistics companies passing on fuel surcharges, potentially feeding further inflation in consumer goods.
