At 4.2%, US Inflation Highest In Three Years; Energy Prices Main Factor

US inflation surged to an annual rate of 4.2% in the month of May, reaching a three-year high, the Bureau of Labor Statistics' Consumer Price Index (CPI) report revealed.

This is the third consecutive monthly increase in inflation since the start of the US-Iran war. The CPI rose at a seasonally adjusted 0.5% for May.

The consumer price index is seen as a broad gauge of the costs of goods and services across the US economy. Both the monthly and annual rate of inflation numbers were in line with the Dow Jones consensus.

Higher energy costs were primarily responsible for the increase in prices, CNBC reported. The increasing cost of plane tickets, recreation, communication and personal and medical care also contributed to inflation levels.

Without volatile food and energy costs, the core CPI rose 0.2% for the month and 2.9% from a year ago. The annual rate was in line with expectations. However, the monthly gain was lower than the 0.3% estimate as well as the 0.4% April increase.

Higher inflation increases the chances of the US Federal Reserve hiking interest rates in a bid to lower spending.

‘The last time inflation was higher was in April 2023, when the United States was still tackling the energy shock started by Russia's invasion of Ukraine, BBC reported.

Overall energy bills, including electricity and gas, were almost a quarter higher in May compared to a year earlier. Petrol was responsible for much of the increase.

While retail gas prices in the US have dropped 40 cents from their high point this year, consumers are still paying almost 40% more on average than they did before the war started in late February.  

The situation could worsen further. Executives and analysts say energy stockpiles have been used up rapidly to make up for the oil that cannot exit the Strait of Hormuz and they could reach critically low levels by June end, as per NBC. This could lead to a sharp hike in fuel costs again.

As hostilities continue between the US and Iran, concerns remain whether a spike in oil prices could shift to other energy-sensitive parts of the country's economy.

Markets were spooked on Wednesday after US President Donald Trump claimed Iran would “pay the price” for not agreeing to a peace deal.

Stock market futures remained in negative territory after the CPI release. Treasury yields were flat.