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

The Consumer Price Index (CPI) increased by 0.5% in May, aligning with consensus forecasts. This brought the year-over-year inflation rate to 4.2%, representing the largest twelve-month increase since early 2023.

Energy prices were a significant contributor to the monthly gain, rising 3.9% in May, with gasoline alone surging 7.0%. Food prices also saw an increase of 0.2%. Excluding these volatile components, the "core" CPI advanced a more modest 0.2% in May, falling below the anticipated 0.3% rise. Over the past year, core prices have climbed 2.9%, a rate nearly identical to the 2.8% observed for the twelve months ending May 2025.

The ongoing conflict in the Middle East continues to exert pressure on inflation, particularly through elevated energy costs. While the expectation is for energy price effects to eventually reverse as the conflict resolves, the uncertain timing leaves the Federal Reserve (Fed) with limited clarity ahead of its upcoming meeting. This meeting, the first under new Chair Kevin Warsh, will include updated economic forecasts from Federal Open Market Committee (FOMC) members, offering insights into the Fed's inflation outlook.

Housing costs remained a primary driver of non-food and energy inflation. Both housing rents for tenants and the imputed rental value of owner-occupied homes, which are substantial components of the index, contributed to the May increase. However, recent data pertaining to home prices and rents suggest that housing inflation may moderate in the coming months, following a statistical anomaly in April related to a lack of comparative data. Other notable price movements within the core group included a 2.7% rise in airline fares, a 1.3% increase in communication costs, and a 0.7% uptick in hospital services. These were partially offset by declines in auto insurance rates (-1.7%) and prescription drug prices (-0.9%).

A concerning development from the May report was the continued erosion of wage purchasing power. Real average hourly earnings, adjusted for inflation, declined by 0.1% in May and are down 0.7% over the past year. Real average weekly earnings have also decreased by 0.4% in the last year. Despite these pressures, consumer spending has not yet significantly pulled back in other categories, potentially supported by large tax returns and a lower saving rate. However, this trend is deemed unsustainable in the long term. Future inflation trends will be closely watched, particularly developments in the M2 money supply, which is considered a reliable indicator for sustained inflation and suggests a potential faster-than-expected decline in inflation once geopolitical tensions ease.

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**: An inflation measure that excludes volatile food and energy prices from the overall CPI. It is often seen as a better indicator of underlying inflation trends.

3. **Real Average Hourly Earnings**: The average hourly earnings of all workers, adjusted for the effects of inflation, providing a measure of purchasing power.