Inflation throughout the United States picked up in May as the disruption to worldwide energy supplies from the Iran conflict kept driving costs upward.

The Consumer Price Index increased at a yearly pace of 4.2%, higher than the 3.8% recorded the month before and reaching the top level since April 2023.

By the numbers

Analysts surveyed by financial data provider FactSet had forecast that inflation for May would advance at a yearly rate of 4.2%.

The CPI measures a selection of goods and services commonly purchased by households and follows shifts in costs across periods.

Inflation has risen from a yearly pace of 2.4% in January to a three-year peak, propelled mainly by the energy disruption tied to the Iran conflict. The shutdown of the Strait of Hormuz has interrupted worldwide supply routes, lifting expenses on items ranging from gasoline to airline tickets.

In its May release, the Labor Department noted that energy costs made up more than 60% of the monthly CPI gain. Gasoline prices increased 40.5% compared with the prior year.

Fuel costs have moderated somewhat in June according to the CBS News gas and oil price tracker. Yet that drop does not appear in the May figures.

Grocery expenses captured by food at home advanced 2.7% from a year earlier. Tomato costs climbed 32% while lettuce rose nearly 25%. Coffee prices increased 17.5% year over year.

Core inflation, which leaves out the more variable food and energy groups, grew at a yearly rate of 2.9%, a modest rise from 2.8% in April.

What the experts say

Household finances face strain from climbing inflation that exceeds wage gains, noted Elizabeth Renter, senior economist at NerdWallet, in a Wednesday message. Three-quarters of Americans reported that their earnings are not matching inflation, based on a recent CBS News poll.

Consumers face higher outlays for necessities and feel unable to ease this burden, Renter said.

Even so, the inflation report showed some positive notes. Apart from areas directly affected by the Iran conflict, certain prices appear to be softening.

For example, costs for select goods declined for the first time in 14 months, including new cars, home furnishings and prescription medications, according to EY-Parthenon chief economist Gregory Daco in a message.

Those reductions may indicate that most tariff-related cost shifts have already occurred, Daco wrote.

What does this mean for Fed rate cuts?

The inflation increase has altered forecasts for the Federal Reserve interest-rate outlook. In January, analysts had mainly considered when the Fed would next lower rates.

Now the price surge together with a robust jobs market has led some observers to anticipate that the central bank next step might instead involve a rate increase.

At present, Fed policymakers are projected to keep borrowing expenses steady at their upcoming policy session scheduled for June 17 while they evaluate whether the inflation jump will last. CME Group FedWatch tool indicates a 96% chance that the central bank will maintain its key rate unchanged next week.

The Fed will lack room to reduce rates if this trend persists, said Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a message. More crucially the market has begun to price in the chance that the Fed next action could require an increase rather than a reduction as many anticipated at the start of the year.