Higher gasoline prices likely pushed up US consumer inflation again in May

WASHINGTON — U.S. consumer inflation likely accelerated in May to its fastest annual pace in three years, driven largely by higher energy costs linked to tensions in the Middle East. The increase is expected to strengthen the Federal Reserve’s case for keeping interest rates unchanged for the rest of the year.

Economists surveyed by Reuters expect the Consumer Price Index (CPI), due to be released by the Labor Department on Wednesday, to show a third consecutive month of strong year-on-year inflation. The report is also expected to highlight growing pressure on household finances as more Americans rely on savings to support spending.

Analysts said inflation is likely to outpace wage growth for a second straight month, raising concerns about consumer spending and broader economic growth in the second half of the year.

“The top-line increase in inflation will outpace wage growth for the second consecutive month,” said Joseph Brusuelas, chief economist at RSM. “Americans are seeing their paychecks decline in real terms, which could create challenges for household consumption later this year.”

According to the Reuters survey, CPI is forecast to rise 4.2% in the 12 months through May, up from 3.8% in April and 3.3% in March. If realized, it would mark the largest annual increase since April 2023.

On a monthly basis, consumer prices are expected to rise 0.5% in May after increasing 0.6% in April.

The Federal Reserve uses the Personal Consumption Expenditures (PCE) Price Index as its preferred inflation measure and targets a 2% inflation rate. Current inflation readings remain well above that goal.

Energy prices have been a major contributor to inflation. Data from the U.S. Energy Information Administration showed that the national average gasoline price increased 8.8% in May to $4.60 per gallon. Gasoline prices had surged by more than 50% following military actions involving the United States, Israel, and Iran earlier this year.

Although energy prices have eased in recent weeks following a ceasefire, economists remain cautious about future developments.

“There is a good chance that the year-over-year advance in headline inflation peaks for the moment in May,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. “However, oil prices could rise again depending on events in the Middle East.”

The inflation report follows last week’s employment data, which showed the U.S. economy added jobs at a stronger-than-expected pace for a third consecutive month in May. The unemployment rate remained steady at 4.3%.

Despite concerns about inflation, many economists believe the Federal Reserve is unlikely to raise interest rates unless higher energy costs begin pushing up prices across a broader range of goods and services.

Core CPI, which excludes the volatile food and energy categories, is expected to rise 2.9% year-on-year in May, compared with 2.8% in April. On a monthly basis, core inflation is projected to increase 0.3% after rising 0.4% the previous month.

“If the core CPI begins showing signs that higher energy costs are spreading into other categories, that could strengthen the case for a Fed rate hike,” said James Knightley, chief international economist at ING.

Economists also noted that some factors are helping to ease inflation pressures. Falling prices for used cars and trucks have helped moderate goods inflation, while the effects of import tariffs appear to be fading.

“The economy is nearing the end of the tariff pass-through phase,” said Diego Anzoategui, an economist at Morgan Stanley. He estimated that tariffs have increased prices by about 63 basis points so far, with most of their impact already reflected in consumer prices.

While inflation remains elevated, economists are divided on how long current price pressures will persist. Much will depend on energy markets, consumer spending trends, and future developments in the Middle East. -Reporting by Lucia Mutikani; Editing by Andrea Ricci/Reuters