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Inflation Likely Reached 3-Year High 06/10 06:11
Consumer prices probably jumped in May for the third straight month,
heightening concerns for the inflation fighters at the Federal Reserve and
underscoring the threat that rising costs pose for the Trump administration as
midterm elections near.
WASHINGTON (AP) -- Consumer prices probably jumped in May for the third
straight month, heightening concerns for the inflation fighters at the Federal
Reserve and underscoring the threat that rising costs pose for the Trump
administration as midterm elections near.
Inflation is expected to reach 4.2% in May from a year earlier when the
Labor Department reports last month's figures Wednesday, according to a survey
of economists by data provider FactSet The annual increase would be up from the
3.8% reading in April. On a monthly basis, prices are forecast to have risen a
hefty 0.5%, slightly below the 0.6% increase in April.
Inflation had been cooling before President Donald Trump imposed sweeping
tariffs in April 2025, which lifted the costs of many goods. Prices have since
surged after the Iran war made oil and gas more expensive, making affordability
a key political issue. The main question now is whether inflation will fade if
the war ends and oil and gas prices fall, or will it persist even after the war.
Some economists worry that prices are still elevated in areas that should be
unaffected by gas costs, such as dental care, motor vehicle repair, and other
services. At the same time, wages are rising only modestly, which should reduce
pressure on firms to raise prices further.
To that end, economists and financial markets will closely watch core
prices, which exclude the volatile food and energy categories. Core inflation
is forecast to have risen 0.3% in May from April, according to FactSet, a pace
that is consistent with annual readings far higher than the Fed's 2% target. On
an annual basis, core inflation may tick higher to 2.9% from 2.8%.
Gas prices have fallen this month, but they rose in May because of Iran's
closure of the Strait of Hormuz, which has choked off about a fifth of the
world's oil supply. Prices at the pump rose, on average, from about $4.04 in
mid-April to $4.49 in mid-May, according to the Energy Information
Administration.
They have since fallen back to $4.16 on average nationwide, according to
AAA, which could lead to a cooler inflation reading in June.
More expensive diesel fuel has lifted shipping costs, with companies like
UPS and FedEx adding fuel surcharges in the past couple of months. That is
likely to push up grocery prices, which jumped 0.7% in April and are 2.9%
higher than a year ago.
Stubbornly high inflation has shifted the debate among Fed policymakers, who
had signaled at the start of the year that they were inclined to cut their key
rate twice more this year. Now, more officials are saying they expect the Fed's
next move will likely be a hike rather than a cut. When the Fed boosts its key
rate, it typically over time leads to higher borrowing costs for mortgages,
auto loans, and business loans.
Wall Street investors expect the Fed to raise rates in December, according
to futures prices tracked by CME Fedwatch.
Despite higher inflation, the job market appears to be improving, with
hiring increasing to a healthy level in May, and the economy is still growing.
These positive signs suggest the Fed doesn't need to cut rates to stimulate
growth and hiring. They also signal that the Fed's rate isn't so high that it
is weighing on the economy. Yet some officials want rates to cool growth a bit,
because that can bring down inflation.
Interest rates on two-year and 10-year Treasury securities have increased
since Friday's jobs report showed hiring accelerated in May, a sign investors
expect inflation may remain elevated and eventually require Fed rate hikes.
Higher inflation has put the new Fed Chair, Kevin Warsh, in a difficult
spot. He advocated for rate cuts last year and was chosen by Trump to replace
Jerome Powell, after Trump relentlessly criticized Powell for not reducing
rates more quickly. Yet for now, Trump and White House officials are mainly
arguing that interest rates don't need to increase, rather than demanding
further cuts.
Some economists still see tariffs pushing up some costs, particularly
clothing, which jumped 0.6% in April and are 4.2% more expensive than a year
ago. Pricier fuel may have also led to higher airline fares last month, which
would lift core inflation.
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