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

The U.S. Consumer Price Index (CPI) rose by 0.5% in May, aligning with economists' forecasts. This increase brings the annual inflation rate to 4.2%, marking the largest twelve-month jump since early 2023. Energy prices were a significant contributor to the May increase, climbing 3.9%, with gasoline alone surging 7.0%. Food prices also saw a modest rise of 0.2% during the month.

The core CPI, which excludes the volatile food and energy sectors, increased by a more subdued 0.2% in May, falling below the consensus estimate of a 0.3% rise. Over the past year, core prices have advanced 2.9%, a rate nearly identical to the 2.8% recorded for the twelve months ending in May 2025.

The ongoing conflict in the Middle East continues to exert pressure on inflation, particularly through energy costs, which accounted for more than half of May's overall CPI increase. While the impact of elevated energy prices is expected to wane once global tensions subside, the timing remains uncertain. This situation presents a challenge for the Federal Reserve as its Federal Open Market Committee (FOMC) prepares for its first meeting under new Chair Kevin Warsh next week.

Beyond energy, housing rents, encompassing both tenant payments and the imputed rental value of owner-occupied homes, were a primary driver of the non-food and energy inflation in May. However, recent data on residential property values and rental rates suggest that housing-related inflation may moderate in the coming months. Other notable increases in key components included airline fares (+2.7%), communication services (+1.3%), and hospital services (+0.7%), though these were partially offset by declines in auto insurance premiums (-1.7%) and prescription drug prices (-0.9%).

A concerning development from the report is the continued erosion of purchasing power for American workers. Real average hourly earnings, adjusted for inflation, declined 0.1% in May and are now down 0.7% over the past year. Real average weekly earnings have fallen 0.4% in the last year. Despite these pressures, consumer spending in other categories has so far not significantly pulled back to offset higher energy costs, likely supported by factors such as tax refunds and a lower saving rate.

### 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, specifically 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, indicating the actual purchasing power of wages.