Inflation in the United States accelerated in May to its highest level in three years as surging energy prices pushed consumer costs higher, though underlying price pressures remained more moderate than expected.
The consumer price index (CPI), a broad measure of goods and services costs across the U.S. economy, rose 0.5% in May on a seasonally adjusted basis, lifting the annual inflation rate to 4.2%, according to data released by the Bureau of Labor Statistics (BLS) on Wednesday.
Both figures matched market expectations, although the monthly increase was slightly below April's 0.6% rise.
The annual inflation rate climbed above 4% for the first time since 2023 and marked the highest reading since April of that year. It also exceeded April's annual increase of 3.8%.
Despite the headline acceleration, underlying inflation pressures were less pronounced. Excluding the often-volatile food and energy categories, core CPI increased 0.2% during the month and 2.9% from a year earlier.
While the annual core reading was in line with forecasts, the monthly increase came in below expectations for a 0.3% gain and was lower than April's 0.4% rise, suggesting broader price pressures remain relatively contained.
The inflation report arrives at a critical time for financial markets and policymakers as Federal Reserve officials prepare for their next interest-rate decision. Investors widely expect the Federal Open Market Committee to leave rates unchanged when it announces its decision on 17 June, though markets will closely scrutinise policymakers' assessment of inflation risks.
Concerns have intensified following the escalation of hostilities between the United States and Iran, which has driven a sharp rise in oil prices and renewed fears that higher energy costs could spread throughout the broader economy.
Markets were unsettled again on Wednesday after President Donald Trump warned that Iran would "pay the price" for failing to accept a peace agreement, adding to geopolitical uncertainty and supporting further gains in crude oil prices.
The CPI report showed energy costs were the primary driver of inflation during the month. Energy prices jumped 3.9% in May, lifting the annual increase to 23.5%.
In contrast, core goods prices declined 0.1% during the month, indicating that tariff-related inflationary pressures remain limited despite concerns over rising trade barriers.
Food prices rose a modest 0.2%, while shelter costs, one of the Federal Reserve's most closely watched inflation measures, increased 0.3%, half the pace recorded in April.
On an annual basis, shelter costs were up 3.4%.
Because housing-related expenses account for more than one-third of the CPI basket, moderation in shelter inflation could provide some reassurance to policymakers that broader inflation pressures are not accelerating significantly.
Other categories also suggested a limited pass-through from higher energy prices. Transportation services fell 0.6% during the month, while services excluding energy services increased 0.3%, down from a 0.5% rise in April.
Vehicle-related costs were mixed. Prices for new vehicles declined 0.3%, while used cars and trucks edged 0.1% higher. Airline fares rose 2.7%, reflecting the impact of higher fuel costs on travel expenses, while motor vehicle insurance prices fell 1.7%.
Following the release of the inflation data, futures markets continued to indicate that the Federal Reserve is likely to keep interest rates unchanged through much of the remainder of the year.
According to CME FedWatch data, markets were pricing in a 71.2% probability of at least one interest rate increase by December.
Federal Reserve Chair Kevin Warsh has previously suggested that interest rates could eventually move lower, arguing that productivity gains from artificial intelligence may exert a disinflationary influence on the economy over time.
