WASHINGTON, June 10 – Consumer prices across the United States are expected to have climbed in May at their steepest rate in three years, with escalating gasoline costs from Middle East tensions driving the increase and potentially convincing the Federal Reserve to maintain current interest rates through 2024.
Wednesday’s anticipated Consumer Price Index data from the Labor Department would mark the third consecutive month of robust year-over-year inflation readings, intensifying financial strain on American families as more people tap into personal savings to cover expenses. For the second month running, inflation is projected to exceed wage increases, potentially dampening broader economic expansion.
Rising living costs present a significant political challenge for President Donald Trump and his Republican Party as they work to maintain Congressional control in November’s midterm elections. Despite Trump’s 2024 presidential victory built largely on pledges to reduce inflation, his approval numbers have declined as economic frustrations grow.
“The top-line increase in inflation will outpace wage growth for the second consecutive month,” said Joseph Brusuelas, chief economist at RSM. “What that means is Americans are seeing their paycheck decline in real terms, which, if it were sustained, would tend to suggest we’re going to have a challenge around household consumption in the second half of the year.”
Economic forecasters surveyed by Reuters predict the Consumer Price Index climbed 4.2% over the 12 months ending in May, representing the steepest annual increase since April 2023 and surpassing April’s 3.8% gain. March saw a 3.3% year-over-year rise. Monthly figures are expected to show a 0.5% May increase following April’s 0.6% advance.
While the Federal Reserve uses Personal Consumption Expenditures Price Indexes to measure progress toward its 2% inflation goal, all price measures currently exceed that target.
National gasoline prices jumped 8.8% during May to reach $4.60 per gallon, according to U.S. Energy Information Administration data. Gas prices had surged more than 50% at one point following late February attacks by the U.S. and Israel on Iran.
Recent weeks have seen some price relief amid ceasefire developments, giving economists cautious optimism that May inflation figures might represent a temporary peak. While Strait of Hormuz shipping restrictions have elevated fertilizer costs, food prices have not yet seen significant impact.
“There is a good chance that the year-over-year advance in headline inflation peaks for the moment in May, though, of course, oil prices could surge again depending on the course of events in the Middle East,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
LABOR MARKET IS RESILIENT
The inflation report follows last week’s employment data showing the economy added jobs above expectations for three straight months in May. Unemployment held steady at 4.3% for the third consecutive month. While financial markets have begun factoring in potential rate increases, economists maintain that the Federal Reserve faces a high threshold for tightening monetary policy.
Some analysts note that beyond elevated airfare costs, there’s limited evidence of oil price shocks spreading into service sectors.
Core CPI, which strips out volatile food and energy prices, is forecast to have risen 2.9% annually in May compared to April’s 2.8% increase. Monthly core CPI projections show a 0.3% gain after April’s 0.4% rise.
“If the core was to show some signs of pass through, higher energy costs being reflected into other categories as well, then that would be the story that would trigger the Fed rate-hike narrative,” said James Knightley, chief international economist at ING. “We’re in an environment where we’ve got a central bank that still considers the monetary policy stance to be somewhat restrictive.”
Expected monthly CPI moderation partly reflects diminishing effects from a one-time rent adjustment following last year’s government shutdown that disrupted data collection. Artificial intelligence spending increases are pushing up computer and software prices, though these carry less weight in core CPI calculations compared to core PCE inflation measures.
Unexpected declines in used vehicle prices have helped contain goods inflation. Economists remain split on import tariff impacts, with some seeing the pass-through effects largely complete while others argue duties continue elevating prices, particularly for clothing.
“The economy is nearing the end of the tariff pass-through phase,” said Diego Anzoategui, an economist at Morgan Stanley. “Our estimates suggest tariffs have lifted prices by about 63 basis points so far, with total pass-through closer to 70 basis points. We saw early signs of deceleration in March and expect that trend to continue.”
