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- October 19, 202617°
Iran War Pushes May Inflation Higher in the US
US inflation is expected to rise for the third consecutive month in May. The war with Iran has driven up energy prices, increasing pressure on consumers.
US inflation for May is expected to have increased for the third consecutive month as the ongoing war with Iran pushes energy prices higher. The consumer price index data to be released on Wednesday will reveal the extent of price pressures.
Economists surveyed by Dow Jones forecast annual inflation to rise to 4.2%. This rate is significantly above the 2.4% level seen before the war began and would be the highest since early 2023.
Energy Prices Add to Inflationary Pressure
Analysts say high energy costs continue to exert upward pressure. Lloyd’s Bank analysts note that although energy prices may be less volatile than in the previous two months, they are still likely to support inflation.
Since the war started, oil prices have risen about 40%. US crude briefly surpassed $115 per barrel in early April.
Although pump prices have recently fallen by 40 cents, drivers are still paying roughly 40% more for fuel on average compared to pre-war levels. This indicates ongoing strain on consumer budgets.
Straits of Hormuz and Stock Concerns
Company executives and analysts warn that easing prices do not fully reflect another risk area. Energy stocks are being rapidly drawn down to replace oil trapped in the Strait of Hormuz, with some observers fearing these reserves could reach critically low levels by the end of June.
Exxon Mobil executive Neil Chapman said at last month’s Bernstein investment conference that prices could spike sharply if stocks hit critical levels. This warning keeps the possibility of a new market wave alive.
Core Inflation and Other Components
Wednesday’s report will closely watch core inflation excluding food and energy. Expectations are for the core measure to return near 3%.
Bank of America analysts wrote that aside from airline tickets, inflation has not yet strongly permeated core items overall. However, many indicators suggest this transition may soon begin.
Analysts say this scenario recalls the risk of a repeat of the price surge seen in 2022, when annual inflation rose to 8.9% amid the Covid-19 pandemic and its aftermath.
Companies are increasingly citing rising material costs. The Bank of America team attributes this to both inflation and supply chain disruptions.
Tariffs and Fed Pressure
According to JPMorgan’s chief US economist Michael Feroli, tariffs have returned to the top of the agenda. President Donald Trump’s plan to impose at least a 10% tax on products from 60 countries has reignited debate.
These tariffs, not yet finalized and containing many exemptions, could affect imports from key trade partners such as China, Taiwan, the European Union, Canada, and Mexico. Clothing, white goods, and some other household products may be impacted.
Last week’s strong employment data has also made price pressures more critical for the Fed. The creation of 172,000 new jobs in May has shifted monetary policy focus more toward inflation.
Market participants expect one rate hike by year-end and price about a 60% chance of an increase by October. Cleveland Fed President Beth Hammack said if recent data continue, monetary policy may need to act to address rising inflation risks.
Hammack also noted that policy might not be tight enough to bring inflation down to the 2% target. This assessment raises questions about how the Fed will balance its approach going forward.
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