Consumer prices rose 4.2% annually in May, highest in three years

Inflation accelerated in May as rising energy costs contributed to pain for consumers, though underlying pressures were less intense.

The consumer price index, a broad gauge of goods and services costs across the U.S. economy, rose at a seasonally adjusted 0.5% for the month, putting the annual inflation rate at 4.2%, the Bureau of Labor Statistics reported Wednesday. Both numbers were in line with the Dow Jones consensus.

Inflation climbed above 4% for the first time in three years, though the increase met expectations amid concerns over how much the surge in energy prices would impact the economy. The level was the highest since April 2023 and above the 3.8% level from April.

However, stripping out volatile food and energy prices, the so-called core CPI accelerated 0.2% for the month and 2.9% from a year ago. While the annual rate was in line with the forecast, the monthly gain was below the 0.3% estimate and less than the 0.4% April increase.

The report comes at a sensitive time for markets and policymakers as Federal Reserve officials contemplate their next move on interest rates. Markets largely expect the rate-setting Federal Open Market Committee to remain on hold when the decision is released June 17, but investors will be looking for signs of how concerned officials are over the inflation surge.

With the U.S. caught in ongoing hostilities with Iran, concerns are rising that the surge in oil prices could spread to other energy-sensitive parts of the economy. Markets were rattled again Wednesday when President Donald Trump warned that Iran will "pay the price" for not taking a peace deal.

Stock market futures held in negative territory but were off their lows after the CPI release while Treasury yields were flat.

The report indicated that much of the inflation surge came from a 3.9% jump in energy prices, putting the 12-month increase at 23.5%. Food accelerated just 0.2% and shelter costs, a key input for Fed policy, rose 0.3%, half the gain of April.

Elsewhere, transportation services fell 0.6%, a potential indicator that high energy costs were not filtering into other areas, while new vehicle costs declined 0.3% and used cars and trucks nudged up 0.1%.

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