Inflation pressures mount as Iran turmoil drives May consumer prices higher

Inflation is projected to advance for the third month in a row in May as the war with Iran sends energy prices higher and intensified pressure on US consumers.

According to economists surveyed by Dow Jones, the annual rate of inflation hit a high at 4.2% well above the 2.4% level seen before the war at its highest point since early 2023. 

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Oil prices have surged nearly 40% since the start of the war with Iran. Subsequently US crude oil rose to more than $115 a barrel in early April.

Retail gasoline prices have dropped by 40 cents from their high this year. Consumers seem worried at the pump, and they are still paying around 40% on average than they did before the geopolitical tensions began.

Analysts warn that the subsiding prices don’t account for a growing problem. Energy stockpiles are being consumed immediately to make up for oil that can’t make it out of the Strait of Hormuz, and they could reach critically low levels by the end of June.

According to Bank of America analysts: “However, numerous indicators suggest that this pass-through is likely to occur soon, raising concerns that inflation may repeat the pattern observed in 2022.”

Concerning last week's job report, the US added 172,000 jobs in May which means inflation is a major focus for the policymakers assessing alternatives on interest rates. Traders are now pricing in a rate decision by December with a 60% chance of it occurring by October.

Deutsche Bank economists said Friday: “In short, there was very little to disparage in the latest labor market data and at minimum Fed officials are likely to feel increasingly confident that employment has stabilized.”

Beth Hammack warned that if recent data trends continue, she may soon advise policymakers to act against the escalating dangers of elevated inflation.