Inflation accelerated for a third-straight month in May amid a stalemate in negotiations to end a war with Iran that has pushed up energy prices, adding to the burden on already strained consumers.
The Consumer Price Index rose 4.2 percent in May from a year earlier, the Bureau of Labor Statistics reported on Wednesday, a sharp rise from the 2.4 percent annual increase before the conflict started in February and the fastest pace since April 2023. Over the course of the month, overall prices jumped 0.5 percent.
The increase has been driven almost entirely by energy prices, which are up 23.5 percent from this time a year ago. Americans have felt that effect most acutely while filling up their vehicles: A gallon of gasoline costs $4.24 on average, according to AAA, up more than a dollar from a year ago.
Faster price gains have wiped out the pay increases Americans have received over the past year, on average. Adjusted for inflation, hourly earnings have fallen 0.7 percent over the past year and are exactly where they were when President Trump returned to office. Tax refunds that came in the spring have been spent, and reductions to the federal Supplemental Nutrition Assistance Program are now cutting into food budgets.
“It’s quite a negative situation,” said Stephen Brown, chief North America economist for Capital Economics. “Low-income consumers don’t have a lot of room to maneuver at this point.”
That dynamic was visible across earnings reports at large retailers in recent weeks. Dollar General told investors that its customers had been pulling back on food purchases and looking to shop closer to home because of high gas prices. Even people making more than $100,000 a year were still coming in for cheaper essentials, however.
The inflation report contained some reassuring news for the Federal Reserve, which meets next week to decide whether to change interest rates. Monetary policymakers are most interested in the “core” rate, which strips out volatile food and energy prices and is thought to be a better measure of underlying inflation. That index rose 2.9 percent on a year-over-year basis and 0.2 percent for the month, a slower pace than April’s monthly rate.
Price increases for durable goods were also fairly tame, an indication that the tariffs that Mr. Trump imposed last year have largely worked their way into prices. Household furnishings have been falling for the past few months and are up only 2.4 percent over the year. Recreational goods edged down over the month, and new vehicles have been falling in price and are only 0.2 percent more expensive than this time last year.
Prices in some categories are still normalizing from pandemic-era booms, like autos and health insurance, which have dropped 2 percent and 6.4 percent over the year, respectively.
The White House seized on some of those price declines as a sign that Mr. Trump’s economic agenda was delivering “meaningful results for the American people,” as Kush Desai, an administration spokesman, said in a statement.
“The numbers were great,” Mr. Trump told reporters at a bill signing on Wednesday.
But according to a long-running survey from the University of Michigan, the increasing mismatch between earnings and prices has put consumers in a foul mood, which poses a danger for Republicans in November’s midterm elections.
The muted core increase may reassure monetary policymakers that they can avoid raising interest rates for now, even though the labor market appears to be strengthening. But it’s also potentially a sign that companies are doing their best to absorb higher energy costs, aware that shoppers are seeing slower wage increases and are exhausted by high prices.
OpenBrand, a consumer data company, recorded heavier than usual discounting through Memorial Day weekend, Ralph McLaughlin, its chief economist, said.
“There isn’t major evidence that spiking energy prices are really proliferating yet into the rest of the economy,” Mr. McLaughlin said. “It’s showing that at least manufacturers and retailers are perhaps acknowledging that consumers are very price sensitive.”
Energy bills have been spilling into some categories where they make up a large chunk of the ultimate price tag, including airline fares, which rose 2.7 percent in May and 26.7 percent from this time last year. The International Air Transport Association said on Sunday that higher jet fuel prices would cost the industry $100 billion this year.
Hotel rates also increased 0.5 percent last month, in a possible indication of effects from the World Cup, although the hospitality industry has been disappointed by demand for rooms. Admission to sporting events, a volatile category, rose 2.8 percent in May. That kind of discretionary and luxury spending has been driven by high-income consumers, whose stock portfolios have fattened this year.
But grocery prices rose only 0.1 percent over the month, down from 0.7 percent in April, because of falling prices for meat and dairy after a large surge in beef prices. Producers, distributors and retailers have tried to keep prices as stable as possible in hopes that the energy price surge will pass, said Andy Harig, a vice president at FMI, a food industry trade association.
“You want to have some certainty about where we’re headed before you see where the prices go at the consumer level, because you don’t want to have periods where you’re raising and you’re lowering,” Mr. Harig said. “So I think that slowed the price transmission up to this point.”
That may change in the coming months and years, however, as American farmers face a persistent drought, which has lowered yields and price hikes for fertilizer that could force them to plant less next season. For food that is harvested, the supply chain for materials that go into food packaging remains constricted.
Campbell’s Soup, for example, told investors that it would charge five to six percent more in the coming fiscal year because of underlying inflation and the higher cost of energy and materials that come through the Strait of Hormuz.
“Oil obviously gets into products, whether it’s packaging, whether it’s logistics,” Todd Cunfer, Campbell’s chief financial officer, said on the company’s earnings call this week. “And then we’re seeing some aluminum, which comes out of that region, is very, very elevated.”
America’s artificial intelligence boom is also pushing up inflation.
Although electricity in the United States is mostly generated by abundant natural gas and renewable energy sources rather than oil, massive new data centers are adding so much demand for power that prices have risen nearly six percent from last year. Those computing complexes also need the same memory chips that go into nearly all consumer electronics. As a consequence, computer equipment is becoming more expensive, after getting cheaper for decades.
“That long period of low inflation from 2000 to 2020 was driven by technology,” said David Doyle, head of economics at the Macquarie Group. “It feels like we’re on the other side of that, and potentially that means we’re in a structurally higher inflation regime.”
Over the longer term, artificial intelligence may push inflation down by lowering the cost of services. Right now, it’s only adding to the more immediate energy price shock, which could get worse as countries around the world run down their reserves — or better, if a durable peace in the Middle East is reached.
“If the conflict ends, and that’s a big if, we do think it would likely be a peak,” Atsi Sheth, Moody’s Ratings chief credit officer, said of May’s inflation reading. “If it doesn’t, then it won’t.”
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