U.S. Consumer Prices Climbed 0.5% in May, Fuelled 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% higher than a year ago. A significant portion of this surge is attributable to a 3.9% rise in energy prices during May, with gasoline alone jumping 7.0%. Food prices also saw an increase of 0.2%.

The "core" CPI¹, which excludes the volatile categories of food and energy, increased a more modest 0.2% in May, falling below the anticipated 0.3% rise. Over the past year, core prices have advanced 2.9%, a rate nearly identical to the 2.8% observed in the twelve months ending May 2025. This contrasts with the overall CPI's 4.2% annual increase, which marks the largest twelve-month gain since early 2023.

The ongoing conflict in the Middle East continues to exert a substantial influence on inflation data, contributing to the elevated consumer price increases seen in May, following similar outsized gains in March and April. While it is expected that the impact of higher energy costs will eventually dissipate once geopolitical tensions subside, the timing of such a reversal remains uncertain. This uncertainty poses a challenge for policy makers, particularly as the Federal Open Market Committee (FOMC)² convenes next week for its first meeting under the new Chair. This upcoming meeting will also include the release of FOMC members' economic forecasts, known as "dot plots," which will offer insights into how long policymakers anticipate inflationary pressures to persist.

Beyond energy and food, the increase in May’s core CPI was primarily propelled by housing rents, which encompasses both rents paid by actual tenants and the imputed rental value of owner-occupied homes. These housing components represent the largest contributions to the overall index. Recent trends in both home prices and rental rates suggest a potential moderation in housing inflation in the coming months, following an April surge that was attributed to a statistical anomaly arising from a lack of comparable data.

Despite declining real average hourly earnings³, which fell 0.1% in May and are down 0.7% over the past year, consumer spending in other categories has not yet significantly curtailed to offset increased energy expenses. This trend is likely unsustainable. Other notable price movements within the core group included increases in airline fares (+2.7%), communication services (+1.3%), and hospital services (+0.7%), partially offset by decreases in auto insurance (-1.7%) and prescription drugs (-0.9%).

Key terms:

1. **Core CPI:** A measure of inflation that excludes volatile food and energy prices to provide a clearer picture of underlying price trends.

2. **Federal Open Market Committee (FOMC):** The monetary policy-making body of the Federal Reserve System, responsible for setting key interest rates.

3. **Real Average Hourly Earnings:** The average amount of money earned per hour by workers, adjusted for inflation to reflect purchasing power.