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Published : 10 Jun 2026, 10:27 AM
US consumer inflation likely increased at its fastest pace in three years in May as the Middle East conflict raised prices of energy products, which would provide more ammunition for the Federal Reserve to keep interest rates unchanged this year.
The anticipated third straight month of strong year-on-year Consumer Price Index readings from the Labor Department on Wednesday is expected to highlight mounting pressure on households as evidence suggests more consumers are dipping into savings to finance their spending. Inflation is likely to outpace wage growth in May for a second straight month, a development that could weigh on overall economic growth.
The soaring cost of living is a political liability for President Donald Trump and his Republican Party, seeking to retain control of Congress in the midterm elections in November. Trump won the 2024 presidential election in large part because of his promise to lower inflation, but has seen his approval rating tumble as frustration mounts over his handling of the economy.
"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."
The Consumer Price Index likely increased 4.2% in the 12 months through May, a Reuters survey of economists predicted. That would be the largest annual rise in the CPI since April 2023 and would follow a 3.8% advance in April. The CPI increased 3.3% year-on-year in March. It is expected to have increased 0.5% on a monthly basis in May after advancing 0.6% in April.
The US central bank tracks the Personal Consumption Expenditures Price Indexes for its 2% inflation target. All inflation measures are running well above the Fed's target.
The national average gasoline price increased 8.8% in May to $4.60 a gallon, data from the US Energy Information Administration showed. At one point, gasoline prices had jumped by more than 50% since the US and Israel attacked Iran at the end of February.
Prices have retreated in recent weeks amid a ceasefire, leaving some economists cautiously hopeful that May could mark the peak in the CPI. Though restricted shipping in the Strait of Hormuz has raised fertilizer prices, that has not yet significantly pushed up food prices.
"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 US economist at Santander US Capital Markets.
Labour Market Is Resilient
The report would follow on the heels of news last week that the economy posted a third straight month of above-expectations job growth in May. The unemployment rate remained at 4.3% for a third consecutive month. Though financial markets have started pricing in a rate hike, economists continued to believe that the bar remained high for the central bank to tighten monetary policy.
Some argued that outside high airfares, there were no strong signs of the oil price shock bleeding into the services sector.
Excluding the volatile food and energy components, core CPI was forecast to have increased 2.9% year-on-year in May after rising 2.8% in April. The so-called core CPI was projected to have gained 0.3% on a monthly basis after rising 0.4%.
"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."
Part of the anticipated moderation in the monthly CPI rate reflects the fading boost from a one-time adjustment to rent measures after last year's shutdown of the government prevented data collection. While the artificial intelligence spending boom is driving up prices of computers and software, those have a smaller weighting in the core CPI basket. The weighting is larger in the core PCE inflation basket.
A surprising used cars and trucks deflation has also helped to curb goods inflation. Economists were divided on import tariffs, with some viewing the pass-through as largely over while others said the duties continued to raise prices, especially those of apparel.
"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."
