Inflation is likely to have increased for a third straight month in May as the war with Iran sent energy prices higher and ratcheted up pressure on U.S. consumers.
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The Bureau of Labor Statistics’ Consumer Price Index for last month will be released at 8:30 a.m. ET Wednesday. Economists surveyed by Dow Jones expect it will show the annual rate of inflation hit 4.2%, well above the 2.4% level it hit before the war and its highest point since early 2023.
“High energy prices will again provide upward pressure, although potentially less than in the previous two months,” analysts at Lloyd’s Bank said.
Since the war with Iran started, oil prices have risen nearly 40%, although they are well off their highs for the year. U.S. crude oil briefly rose to more than $115 per barrel in early April.
Retail gasoline prices have fallen in turn by 40 cents from their high this year. But consumers filling up at the pump are still paying around 40% more on average than they did before the war began.
There could be more pain to come. Executives and analysts warn that the moderating prices don’t account for a growing problem. Energy stockpiles are being drained rapidly to make up for oil that can’t make it out of the Strait of Hormuz, and they could reach critical low levels by the end of June, according to some observers.
Once that happens, prices will “shoot up,” Exxon Mobil executive Neil Chapman said at a Bernstein investment conference last month.
It isn’t clear yet how much of an impact higher oil and fuel prices are having on the retail costs of other consumer products.
Core inflation, which excludes food and energy costs, will be of particular focus in Wednesday’s report. It’s expected to return to near 3%.
“Beyond airfares, there is little evidence” that overall inflation is spilling over to core inflation yet, Bank of America analysts wrote last week. “However, numerous indicators suggest that this pass-through is likely to occur soon, raising concerns that inflation may repeat the pattern observed in 2022.”
That year, annual inflation surged as high as 8.9% as the world grappled with the Covid-19 pandemic and its aftermath.
Increasingly, companies are also talking more about the rising costs of materials, because of both inflation and disruptions in the supply chain, the Bank of America team added.
“Meanwhile, tariffs elbowed their way back into the headlines,” said JPMorgan chief U.S. economist Michael Feroli, referring to a wave of duties President Donald Trump proposed for products from 60 countries.
Those tariffs of at least 10% could affect imports from critical trading partners such as China, Taiwan, the European Union, Canada and Mexico. While the proposed tariffs have dozens of exceptions and haven’t been finalized yet, they could still affect imports of some apparel, appliances and other household goods.
Last week’s strong jobs report, which showed that the U.S. added 172,000 jobs in May, means inflation is even more of a focus for the Federal Reserve as policymakers weigh their next move on interest rates. Traders expect a rate hike by December and see a 60% chance one could happen by October.
“In short, there was very little to disparage in the latest labor market data and at minimum Fed officials are likely to feel increasingly confident that employment has stabilized,” Deutsche Bank economists said Friday.
Even before Friday’s jobs report, however, Fed officials had already been discussing the possibility of a rate increase.
“If recent data trends continue, it may soon be appropriate for policy to act to address the growing risks of persistently elevated inflation,” Beth Hammack, president of the Federal Reserve Bank of Cleveland, said May 2.
“Monetary policy may not be sufficiently restrictive to bring inflation down to 2%,” said Hammack, who is a voter on the Fed’s interest rate-setting committee this year.
