U.S. consumer price inflation is expected to have intensified in May, with energy costs - especially gasoline - seen as the principal driver of the acceleration. A Reuters survey of economists projects the Consumer Price Index rose 4.2% year-on-year in May, which would mark the steepest annual increase since April 2023 and would follow a 3.8% advance in April and a 3.3% gain in March.
On a month-over-month basis, the CPI is forecast to have climbed 0.5% in May after increasing 0.6% in April. If the predictions hold, inflation would again outpace pay growth, extending to a second consecutive month the erosion of consumers' real incomes and putting further strain on household budgets.
"The top-line increase in inflation will outpace wage growth for the second consecutive month," said Joseph Brusuelas, chief economist at RSM. "What that means is Americans are seeing their paycheck decline in real terms, which, if it were sustained, would tend to suggest were going to have a challenge around household consumption in the second half of the year."
Energy and gas prices
Energy costs rose sharply in May amid conflict in the Middle East, boosting headline inflation. Data from the U.S. Energy Information Administration showed the national average gasoline price increased 8.8% in May to $4.60 a gallon. At one point, gasoline prices had jumped by more than 50% since the U.S. and Israel attacked Iran at the end of February. Prices have retreated in recent weeks amid a ceasefire, leaving some economists cautiously hopeful that May could mark the peak in the CPI.
Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, noted that while May might represent a temporary peak, uncertainty remains. "There is a good chance that the year-over-year advance in headline inflation peaks for the moment in May, though, of course, oil prices could surge again depending on the course of events in the Middle East," he said.
Core inflation and broader price pressures
Measures that strip out volatile food and energy items point to a modest uptick in underlying inflation. Core CPI was forecast to have increased 2.9% year-on-year in May after rising 2.8% in April, with a month-on-month gain of 0.3% expected following a 0.4% rise the prior month. The Federal Reserve monitors the Personal Consumption Expenditures Price Indexes against its 2% goal, and all inflation gauges remain comfortably above that target.
Analysts caution that if energy cost increases begin to filter into other categories - for instance, higher transportation or production costs reflected in services or goods prices - the Feds stance could come under renewed pressure. "If the core was to show some signs of pass through, higher energy costs being reflected into other categories as well, then that would be the story that would trigger the Fed rate-hike narrative," said James Knightley, chief international economist at ING. "Were in an environment where weve got a central bank that still considers the monetary policy stance to be somewhat restrictive."
Labor market and household finances
The inflation report will follow data showing the labor market remains resilient. The economy posted its third straight month of above-expectations job growth in May, and the unemployment rate held at 4.3% for a third consecutive month. Those employment trends complicate the Feds policy calculus: while labor strength can support further rate increases, many economists say the bar for additional tightening remains high.
Rising inflation that outpaces wages is already pressuring household consumption. Evidence cited by economists suggests more consumers are drawing on savings to maintain spending, a dynamic that could weigh on growth if the trend persists.
Components moderating or amplifying inflation
- One-time statistical effects are moderating monthly CPI readings. Part of the expected slowdown in the monthly pace reflects the fading influence of an adjustment to rent measures after last years government shutdown hindered data collection.
- Spending tied to the artificial intelligence boom has pushed up prices for computers and software, but those categories have a smaller weight in the core CPI basket. The weighting is larger in the core PCE inflation basket tracked by the Fed.
- A surprising deflation in used cars and trucks has helped restrain goods inflation.
- Restricted shipping through the Strait of Hormuz has lifted fertilizer costs, but that increase has not yet translated into a marked rise in food prices.
Economists remain divided on the role of tariffs in consumer prices. Some see the bulk of tariff pass-through as complete, while others argue duties continue to lift prices, particularly for apparel. "The economy is nearing the end of the tariff pass-through phase," said Diego Anzoategui, an economist at Morgan Stanley. "Our estimates suggest tariffs have lifted prices by about 63 basis points so far, with total pass-through closer to 70 basis points. We saw early signs of deceleration in March and expect that trend to continue."
Political and policy implications
Persistently elevated inflation is a political vulnerability for President Donald Trump and his Republican Party as they seek to maintain control of Congress in the November midterm elections. The report notes that Trump won the 2024 presidential election in large part because of his promise to lower inflation, but has seen his approval rating tumble as frustration mounts over his handling of the economy.
Policymakers will be watching incoming data closely. Continued broad-based inflation gains would bolster arguments in favor of keeping policy restrictive, while signs that price pressures are peaking could ease pressure on the Federal Reserve to take further action.
What to watch
Market participants and policymakers will look for confirmation that headline inflation was driven primarily by temporary energy shocks rather than sustained pass-through into services and goods. The trajectory of oil and gasoline prices, signs of inflationary spillovers into other categories, and whether wage growth accelerates or decelerates relative to prices will be central to assessing the path forward.