U.S. Consumer Prices Climbed 0.5% in May, Driven by Energy Costs

U.S. consumer prices rose 0.5% in May, aligning with consensus forecasts. This increase brings the Consumer Price Index (CPI) to 4.2% year-over-year, marking the largest twelve-month rise since early 2023. The surge was largely driven by energy prices, which jumped 3.9% in May, with gasoline alone increasing 7.0%. Food prices also saw a modest rise of 0.2% during the month.

The "core" CPI, which excludes volatile food and energy components, increased by a more modest 0.2% in May, falling below the anticipated 0.3%. Over the past year, core prices have risen 2.9%, a rate nearly identical to the 2.8% observed in the twelve months ending May 2025. This suggests that while overall inflation is elevated, the underlying trend excluding energy remains relatively stable.

The ongoing conflict in the Middle East is cited as a significant factor influencing the inflation data, particularly the outsized increases in consumer prices seen in March and April. The expectation is that the effects of higher energy costs will largely reverse once the geopolitical situation stabilizes, though the timing of this remains uncertain. This uncertainty poses a challenge for the Federal Reserve as it prepares for its upcoming meeting, the first under new Chair Kevin Warsh. The meeting will include economic forecasts from FOMC members, providing insights into the Fed's outlook on inflation persistence.

Beyond energy, housing rents were a primary contributor to the May increase in core prices. This includes both rents paid by tenants and the imputed rental value of owner-occupied homes, which are significant components of the index. However, recent data on home prices and rents suggest a potential moderation in housing inflation in the coming months, following an April surge attributed to a statistical anomaly related to a lack of comparative data from a previous government shutdown. Other notable movements within the core group included increases in airline fares (+2.7%), communication services (+1.3%), and hospital services (+0.7%), partially offset by declines in auto insurance (-1.7%) and prescription drugs (-0.9%).

A concerning aspect of the report is the continued decline in real average hourly earnings, which are inflation-adjusted wages. These declined 0.1% in May and are down 0.7% over the past year, indicating that wages are losing ground to inflation. Similarly, real average weekly earnings have fallen 0.4% in the past year. While consumer spending has remained resilient despite higher energy costs, this trend may not be sustainable. Future inflation developments will be closely watched, with some analysts suggesting that inflation could drop faster than generally expected once the Iran conflict is resolved, based on trends in the M2 money supply.

Key terms

1. **Consumer Price Index (CPI)**: A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

2. **Core CPI**: A measure of inflation that excludes certain volatile categories from the Consumer Price Index, typically food and energy prices, to provide a clearer picture of underlying inflation trends.

3. **Real Average Hourly Earnings**: The average amount of money earned per hour by workers, adjusted for inflation. This shows the actual purchasing power of wages.