US inflation surges to 4.2% in May, highest since 2023, as Iran war drives energy prices

Inflation hits three-year high

The Consumer Price Index rose 4.2% in the 12 months through May, up from 3.8% in April, according to Labor Department data released Wednesday. The increase marks the highest annual inflation rate since April 2023 and the third consecutive monthly acceleration since the start of the Iran conflict. On a monthly basis, prices rose 0.5%, easing from April’s 0.6% pace.

Core CPI, which excludes volatile food and energy prices, rose 2.9% year-over-year compared with 2.8% in April. The monthly core increase was 0.2%. While the core measure remains elevated above the Fed’s 2% target, economists noted that broader spillover effects from energy costs into other goods and services remain limited for now.

Iran war fuels energy costs

Energy prices accounted for about 60% of the overall monthly increase, with gasoline prices about $1 per gallon higher than a year ago. The Strait of Hormuz closure has disrupted oil markets since the US-Israel war with Iran began earlier this year. Before the conflict, in February, inflation stood at 2.4%, underscoring the direct impact of the war on consumer prices.

Other everyday expenses also rose, with fresh produce, beef, clothing, and energy services all recording increases. Services inflation, which includes shelter costs and is less sensitive to tariffs and energy, continues to run above 3%, signaling that price pressures extend beyond energy and goods.

Political pressure mounts

I didn’t think US fuel prices were very high, relatively speaking.

President Trump has downplayed inflation, describing the rise as temporary, but the sustained price increases pose a political challenge. Consumer sentiment has plummeted to a historic low, falling for three consecutive months, and a New York Fed survey shows households have grown more pessimistic about inflation, jobs, and layoffs.

It’s like taking antibiotics and quitting halfway through. It feels better, but you didn’t actually fight off the entire infection.

The University of Michigan survey director warned that the risk of elevated prices is compounded by inflation having been above the Fed’s 2% target for more than five years, meaning a full return to normal never materialized before recent shocks.

New Fed chair faces early test

The inflation report arrives just before the Federal Reserve’s first policy meeting under new Chair Kevin Warsh, set for next week. Warsh has previously indicated support for lowering interest rates from the current 3.5%–3.75% range, aligning with Trump’s pressure for cuts. However, persistent inflation complicates that path, as lowering rates risks further price increases.

We think it continues to rise slowly toward 4.5 percent, as elevated energy, transportation, and food costs filter through.

The US job market remains strong, with employers adding a surprising 172,000 jobs in May and the unemployment rate holding steady, which could give the Fed room to hold rates steady as it assesses inflation risks.