Inflation crossed 4 percent for the first time in three years in May, as sustained pressure from the Iran war makes clear that the inflationary hit to consumers is far from over.
The Labor Department’s consumer price index rose at a 4.2 percent annual pace in the year ending in May, up from 3.8 percent in April.
Higher energy prices again accounted for much of the monthly gain. Gas prices, which have surged roughly 50 percent since January as the Iran conflict disrupts oil flows through the Strait of Hormuz, rose 7.0 percent in May. The reading marks the third consecutive month in which the conflict has measurably pushed prices higher for American consumers.
Core prices, which exclude volatile food and energy prices to give a better reading of underlying inflation, were up 2.9 percent for the year, matching economists’ expectations.
The overall reading marks the first time inflation has reached 4 percent or more since May 2023 — a span in which prices had been retreating from their pandemic-era peak of above 9 percent, the highest in nearly 40 years, without ever returning to where they were before covid.
Rekindled inflation, even if it proves to be temporary, presents a significant political problem for the White House at a moment when it has staked much of its economic credibility on bringing costs down.
The pain is showing up at the checkout line. Energy costs and tariffs are pushing grocery bills higher, with fresh produce and beef recording among the sharpest increases — and there is little sign of relief in the near term. Services inflation, which includes shelter costs and is insulated from tariffs on goods and energy prices, also is running consistently above 3 percent, a sign that price pressures involve more than the obvious culprits.
The hot inflation report also presents an early test for Kevin Warsh, the new Federal Reserve chair, who faces his first policy meeting next week.
Analysts say that the construction boom for AI data centers is generating its own inflationary pressure, driving up prices for semiconductors and consumer electronics in ways that could linger well into next year. “What we are seeing is three distinct inflation waves — from tariffs, from oil and now AI capex — layered on top of each other,” said Krishna Guha of Evercore ISI, in a research note this week.
The worry among economists is that another surge of inflation could eventually persuade Americans that high prices are simply a more-permanent feature of the economy. That belief, once widespread, tends to become self-fulfilling. Workers demand bigger raises and businesses raise prices before their costs actually rise.
The risk of elevated prices is made worse by the fact that inflation has been above the Fed’s 2 percent target for more than five years, long enough that a return to normal never quite materialized before a series of shocks — including tariffs last year and the Iran war this year — sent prices climbing again.
“We never completed the process,” Joanne Hsu, director of the University of Michigan Survey of Consumers, said in a recent interview. “It’s like taking antibiotics and quitting halfway through. It feels better, but you didn’t actually fight off the entire infection.”
Joe Brusuelas, chief economist at RSM, expects inflation to keep climbing. “We think it continues to rise slowly toward 4.5 percent,” he said ahead of Wednesday’s release, “as elevated energy, transportation, food and fertilizer costs work their way through the economy.”
Warsh, who replaced Jerome H. Powell as chair last month, had signaled openness to interest rate cuts in the lead-up to his nomination in January — a posture that helped smooth his path to the job but that rising inflation may force him to abandon. (Powell is remaining on the board as a governor.)
But some Fed officials have already begun signaling that rate increases may be back on the table at some point soon. Fed governor Christopher Waller, a Republican, said he could “no longer rule out rate hikes further down the road if inflation does not abate soon,” speaking at a central banking conference in Frankfurt last month. He said he would support changing the Fed’s standing guidance released after each policy meeting to make clear that a cut is no more likely than a hike.
Inflation expectations among consumers have been drifting upward. The University of Michigan’s survey showed five-year expectations at 3.9 percent in May, well above pre-pandemic baselines. The New York Fed’s survey, released Monday, put the figure at 3.0 percent — more muted, but still elevated relative to the Fed’s price target.
“Inflation expectations are anchored,” said Ricardo Reis, an economist at the London School of Economics, meaning most Americans still believe prices will eventually return to normal. “But they are not as solidly anchored as they were in 2018.”
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