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Inflation rose strongly for the third consecutive month to 4.2% in May, but this will likely be the peak rate for the year.
Gasoline prices rose 7.0%, but will show a decline in the June report. The Iran war is still preventing ship traffic into and out of the Persian Gulf, which supplies 20% of the world’s oil consumption. But hopes of a deal between the U.S. and Iran have caused the price of crude oil in the U.S. to ease. Still, not much easing can be expected the rest of this year.
Full normalization of energy costs could take well into 2027 because of extensive damage to energy infrastructure in the Middle East. Energy cost increases that have already taken place will bleed into price rises for other consumer products and services, though at a smaller scale. Eventually, food prices will start rising, as one-third of the world’s fertilizer supply is produced in the Persian Gulf region.
Excluding energy, the rest of May’s price report was moderate. The “other commodities” category moved lower, helped by declines in the prices of new vehicles, drugs, and home furnishings. Tariff increases of more than a year ago are no longer adding to the inflation numbers for imported goods. Transportation services costs fell 0.6%, as drops in car insurance and vehicle rental more than balanced a 2.7% rise in airfares caused by higher jet fuel prices. Healthcare costs rose 0.5% after two months of little change. Shelter costs rose 0.3%, close to their usual moderate pace.
The Federal Reserve will not cut interest rates at its policy meetings for the rest of the year, and may consider rate hikes, given the long-lasting impact of oil price increases on inflation. The Fed generally discounts energy price fluctuations in its deliberations on interest rate policy. But the central bank will also note that “core” inflation (excluding food and energy) is likely to creep upwards as the year progresses.
The measure of inflation that the Fed watches, personal consumer expenditures excluding food and energy, came in at 3.3% for April, and will likely be higher when the May data is released on June 25. The Fed wants so-called core PCE inflation to come in at 2%, so it was already well off its benchmark before the Iran war caused energy prices to spike.
