US inflation surges to three-year high of 4.2%
Federal Reserve chair Powell
US prices in May rose at their fastest rate in three years, with inflation surging to 4.2%.
The rise, from 3.8% a month earlier, was largely driven by rising energy costs, the Bureau of Labor Statistics (BLS) said.
It marked the third month in a row the Consumer Price Index (CPI) has risen, with households increasingly feeling the strain of the US and Israel’s war in Iran.
Higher inflation raises the likelihood of the US Federal Reserve raising interest rates in a bid to curtail spending.
The last time inflation was higher was in April 2023, when the US was still grappling with the fallout from the energy shock sparked by Russia’s invasion of Ukraine.
Overall energy bills including gas and electricity were almost a quarter higher in May than a year earlier, with petrol responsible for much of the increase.
According to separate figures from motoring group the AAA, the average price of a gallon of regular petrol in the US is currently $4.15, a sharp increase from $2.98 on February 28, when President Donald Trump launched strikes on Iran.
In response to the strikes, Iran has effectively shuttered the crucial Strait of Hormuz waterway, typically responsible for shipping around a fifth of the world’s oil and gas which has resulted in a surge in prices.
Elsewhere, the BLS pointed to the increasing cost of plane tickets, personal and medical care, recreation and communication.
The CPI is a measure of how much prices have risen in a given month compared to the same month a year prior. The Fed’s long-term inflation target is 2%.
May’s inflation increase captures the challenge facing President Trump and the Republicans ahead of November’s midterm elections.
Economists have warned that, even with a swift resolution to the war, it could take until 2027 for the the normal flow of goods through the Strait of Hormuz to be restored.
It raises the prospect of Americans heading to the polls under the strain of significantly higher prices, following a 2024 campaign in which Trump promised cutting inflation would be at the heart of his agenda.
Trump previously said he does not think about the cost of living facing Americans “even a little bit” in the context of the war, stressing “we can not let Iran have a nuclear weapon, that’s all”.
Higher inflation also poses a challenge for Kevin Warsh, the new governor of the Fed, ahead of his first interest rate decision in charge of the central bank next week.
When inflation is significantly above the Fed’s target rate, the central bank’s board of governors typically moves to raise interest rates. This in turn pushes up borrowing costs and restricts the flow of money in the economy, limiting further price hikes and bringing inflation under control.
In the run up to Warsh’s appointment, Trump repeatedly called on his predecessor, Jerome Powell, and the central bank to cut interest rates.
Economists expect rates to remain at their current level, between 3.5% and 3.75%, next month, but warned further evidence of inflation persisting could force the Fed into an increase.
Stephen Brown, chief North America economist at Capital Economics, said May’s rise alone was “not large enough to prove any ammo” to those on the Fed’s rate-setting committee who want to push interest rates up.
But Isaac Stell, investment manager at asset manager Wealth Club, said an interest rate hike is “the most logical conclusion from today’s data combined with last week’s blow-out jobs numbers”.
By BBC News