US inflation climbs to three-year high as energy prices surge

US inflation accelerated to 4.2% in May, the highest level since April 2023, driven by a surge in energy prices linked to the Iran war.

Inflation rose above 4% for the first time in three years, though the increase was broadly in line with expectations amid concerns over how far higher energy costs would ripple through the economy.

The reading marked the highest level since April 2023 and exceeded April’s 3.8% rate.

On a monthly basis, inflation increased at a slower pace than in April, potentially signaling that the worst of the recent price pressures may have passed.

Another encouraging sign was a slight decline in gasoline prices.

Asked about the Bureau of Labor Statistics report on Wednesday, President Donald Trump said, “I love inflation,” and argued that oil prices had fallen because “we destroyed 22 ships last night.”

According to the report, much of the increase in inflation stemmed from a 3.9% rise in energy prices, which pushed the 12-month increase in that category to 23.5%.

Core CPI, which excludes the more volatile food and energy components and is widely viewed by analysts as a better indicator of future inflation trends, offered some grounds for optimism.

Core prices rose 0.2% in May, down from a 0.4% increase in April and below analysts’ expectations for a 0.3% gain.

Core goods prices fell 0.1% on a monthly basis, suggesting underlying price pressures remained contained.

On an annual basis, CPI increased 2.9%, in line with economists’ expectations.

Ground beef, roast beef and steak prices declined last month, although the parasitic fly outbreak reported in the United States last week could complicate logistics for farmers and contribute to higher prices.

Food prices rose just 0.2%, while shelter costs — a key component for Federal Reserve policy decisions — increased 0.3%, half the pace recorded in April.

Shelter, which accounts for more than one-third of the CPI basket, rose 3.4% from a year earlier.

Government and industry officials stressed that the insect, whose name has attracted widespread attention, does not pose an immediate threat to food supplies.

Meanwhile, transportation services prices fell 0.6%, potentially indicating that higher energy costs have not yet spread broadly across other sectors.

Similarly, services excluding energy services — another measure closely watched for signs of oil-price pass-through effects — rose 0.3% after increasing 0.5% in April.

New vehicle prices fell 0.3%, while used car and truck prices edged up 0.1%.

However, airline fares, a clearer indicator of energy costs feeding through to consumer prices, rose 2.7%, while motor vehicle insurance prices fell 1.7%.

As for interest rates, few observers expect the Federal Reserve to cut rates when it delivers its first policy statement under new Chair Kevin Warsh next Wednesday.

Market expectations point to just one rate move this year: an increase in December.