U.S. inflation expected to rise in May as Iran conflict lifts energy prices

The U.S. Consumer Price Index for May is slated for release on Wednesday, with most forecasts indicating an annual inflation rate of about 4.2%, up from 2.4% before the conflict with Iran began. Analysts attribute the increase primarily to higher energy costs, noting that oil prices have risen roughly 40% since the war started, although they have retreated from earlier peaks.

Retail gasoline prices have fallen modestly from their recent highs, yet drivers are still paying roughly 40% more than before the hostilities began. Energy stockpiles are being drawn down to offset reduced shipments through the Strait of Hormuz, and some observers warn that dwindling reserves could push prices higher later this summer.

Core inflation, which excludes food and energy, is expected to hover near 3% in the upcoming report. Bank of America analysts said there is limited evidence that broader price pressures have yet spilled over into core inflation, but they cautioned that a pass-through could occur soon.

The report comes amid a strong jobs market, with May adding 172,000 positions, prompting the Federal Reserve to consider further interest-rate adjustments. Traders see a roughly 60% chance of a rate hike by October and a possible increase by December.

"If recent data trends continue, it may soon be appropriate for policy to act to address the growing risks of persistently elevated inflation," said Beth Hammack, president of the Federal Reserve Bank of Cleveland.

"Monetary policy may not be sufficiently restrictive to bring inflation down to 2%," Hammack added, noting her role as a Fed rate-setting voter.

Analysts from Deutsche Bank observed that the latest labor market data leaves little room for criticism and may bolster confidence among Fed officials that employment has stabilized. Meanwhile, discussions continue over proposed tariffs on imports from several major trading partners, which could affect the cost of certain consumer goods.