US inflation picks up to three-year high, eroding paychecks

US inflation accelerated in May to the fastest pace in more than three years as the Iran war pushed up energy prices, outstripping Americans’ pay gains. The consumer price index climbed 0.5% from April and 4.2% from a year earlier, the most since early 2023, according to Bureau of Labor Statistics data out Wednesday. An underlying gauge of inflation that excludes food and energy, however, rose a less-than-expected 0.2% from the prior month. More than half of the advance in the overall CPI was due to higher energy costs, though prices in some categories like transportation services, health insurance and new vehicles fell. That offers cold comfort for consumers who are already seeing price hikes eat into their paychecks. Even if there’s a resolution to the war soon, economists see more price increases on the horizon. That could prompt Federal Reserve officials to consider an interest-rate increase this year. Beyond the initial energy shock, disruptions to fertilizer markets may eventually lead to higher grocery bills, while rising transportation costs could boost prices for all kinds of consumer goods. “The longer the Middle East conflict persists, the broader and more persistent inflationary pressures are likely to become,” EY-Parthenon Chief Economist Gregory Daco said in a note. “Higher fertilizer prices will place upward pressure on food inflation, while rising transportation and production costs gradually pass through to a wider range of goods and services.” The S&P 500 opened lower, while Treasury yields were little changed. Prices of household essentials, aside from gasoline, rose at a more muted pace in May, the report showed. Grocery prices increased just 0.1%, held back by declines in beef, tomato and cheese prices. Energy services costs, a category which includes utilities prices like electricity and natural gas, also advanced at a slower pace. Gasoline climbed 7%. A separate report Wednesday that combines the inflation figures with recent wage data showed that real average hourly earnings fell 0.7% from a year earlier, the biggest drop in more than three years. The combination of higher prices and weaker pay gains is putting more stress on household budgets at a time when consumer sentiment is already at record lows, and will likely be front and center in November’s midterm elections. President Donald Trump’s approval ratings have slumped as Americans have soured on his handling of the economy, which he had previously counted as an area of strength. “Inflation remains a serious problem for consumers and they’re paying more for energy, but also for other items, which will be a drag on consumer spending growth later this year,” said Gus Faucher, chief economist at PNC Financial Services Group. Wednesday’s report showed airfares rose 2.7% in May, and delivery services costs posted a firm advance for a third month. Those are two categories economists have been watching to assess whether higher energy prices are starting to filter into core inflation. Prices for goods excluding food and energy, another category which may see a boost from the impact of the war, fell 0.1%, the most in more than a year. Economists have also been keeping an eye on goods prices for signs as to whether retailers are still passing on costs from Trump’s tariffs. The president sought to downplay the CPI data, calling the figures “great” and suggesting fuel costs would be even higher if not for US efforts to get oil shipments out of the Strait of Hormuz. “You know what I really love? I love the inflation,” Trump said Wednesday. That’s because once the war is over “it’s going to come down like a rock.” While used-car prices rose slightly, prices for new vehicles fell for a second month. Apparel prices continued to rise, though at a slower pace than in the last few months. A deceleration in rental inflation helped offset increases in other categories after it was boosted in April by a measurement quirk related to last year’s government shutdown. Owners’ equivalent rent, the largest component of the CPI, rose 0.3%. Hotel rates rose 0.5%, marking a fourth straight month of increases. Some economists suggested ahead of the report that they could go up in anticipation of the FIFA World Cup, which is set to take place in 11 American cities starting this week. Restaurant prices also advanced. A services gauge Fed officials watch closely, which strips out housing and energy costs, rose by less than in April. The Fed’s preferred measure of inflation, the personal consumption expenditures price index, doesn’t put as much weight on shelter as the CPI. Figures on producer prices due Thursday will offer insights on additional categories — including a measure of airfares — that feed directly into the PCE, which will be released later this month. Fed officials are widely expected to hold rates steady at their June 16-17 policy meeting, which will be the first over which the central bank’s new chairman, Kevin Warsh, presides. But investors expect the Fed to raise rates by the end of the year in response to higher inflation, according to futures. -- By Augusta Saraiva (Bloomberg)

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US inflation picks up to three-year high, eroding paychecks

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