Inflation accelerates to fastest pace in 3 years as energy prices bite
- The San Juan Daily Star
- 4 hours ago
- 4 min read
By LYDIA DePILLIS
Inflation accelerated for a third straight month in May amid a stalemate in negotiations to end a war with Iran that has pushed up energy prices, adding to the burden on already strained consumers.
The consumer price index rose 4.2% in May from a year earlier, the Bureau of Labor Statistics reported earlier this week, a sharp rise from the 2.4% annual increase before the conflict started in February and the fastest pace since April 2023. Over the course of the month, overall prices jumped 0.5%.
The increase has been driven almost entirely by energy prices, which were up 23.5% from a year earlier. Americans have felt that effect most acutely while filling up their vehicles: A gallon of gasoline costs $4.24 on average, according to AAA, up more than a dollar from a year ago.
Faster price gains have wiped out the pay increases Americans have received over the past year, on average. Adjusted for inflation, hourly earnings have fallen 0.7% over the past year and are exactly where they were when President Donald Trump returned to office. Tax refunds that came in the spring have been spent, and reductions to the federal Supplemental Nutrition Assistance Program are now cutting into food budgets.
“It’s quite a negative situation,” said Stephen Brown, chief North America economist for Capital Economics. “Low-income consumers don’t have a lot of room to maneuver at this point.”
That dynamic was visible across earnings reports at large retailers in recent weeks. Dollar General told investors that its customers had been pulling back on food purchases and looking to shop closer to home because of high gas prices. Even people making more than $100,000 a year were still coming in for cheaper essentials, however.
The inflation report contained some reassuring news for the Federal Reserve, which meets next week to decide whether to change interest rates. Monetary policymakers are most interested in the “core” rate, which strips out volatile food and energy prices and is thought to be a better measure of underlying inflation. That index rose 2.9% on a year-over-year basis and 0.2% for the month, a slower pace than April’s monthly rate.
Price increases for durable goods were also fairly tame, an indication that the tariffs Trump imposed last year have largely worked their way into prices. Household furnishings have been falling for the past few months and are up only 2.4% over the year. Recreational goods edged down over the month, and new vehicles have been falling in price and are only 0.2% more expensive than this time last year.
Prices in some categories are still normalizing from pandemic-era booms, such as autos and health insurance, which have dropped 2% and 6.4% over the year, respectively.
The White House seized on some of those price declines as a sign that Trump’s economic agenda was delivering “meaningful results for the American people,” as Kush Desai, an administration spokesperson, said in a statement.
“The numbers were great,” Trump told reporters at a bill signing Wednesday.
But according to a long-running survey from the University of Michigan, the increasing mismatch between earnings and prices has put consumers in a foul mood, which poses a danger for Republicans in November’s midterm elections.
The muted core increase may reassure monetary policymakers that they can avoid raising interest rates for now, even though the labor market appears to be strengthening. But it’s also potentially a sign that companies are doing their best to absorb higher energy costs, aware that shoppers are seeing slower wage increases and are exhausted by high prices.
OpenBrand, a consumer data company, recorded heavier than usual discounting through Memorial Day weekend, Ralph McLaughlin, its chief economist, said.
“There isn’t major evidence that spiking energy prices are really proliferating yet into the rest of the economy,” McLaughlin said. “It’s showing that at least manufacturers and retailers are perhaps acknowledging that consumers are very price sensitive.”
Energy bills have been spilling into some categories where they make up a large chunk of the ultimate price tag, including airline fares, which rose 2.7% in May and 26.7% from a year earlier. The International Air Transport Association said Sunday that higher jet fuel prices would cost the industry $100 billion this year.
Hotel rates also increased 0.5% last month, in a possible indication of effects from the World Cup, although the hospitality industry has been disappointed by demand for rooms. Admission to sporting events, a volatile category, rose 2.8% in May. That kind of discretionary and luxury spending has been driven by high-income consumers, whose stock portfolios have fattened this year.
But grocery prices rose only 0.1% over the month, down from 0.7% in April, because of falling prices for meat and dairy after a large surge in beef prices. Producers, distributors and retailers have tried to keep prices as stable as possible in hopes that the energy price surge will pass, said Andy Harig, a vice president at FMI, a food industry trade association.
“You want to have some certainty about where we’re headed before you see where the prices go at the consumer level, because you don’t want to have periods where you’re raising and you’re lowering,” Harig said. “So I think that slowed the price transmission up to this point.”
America’s artificial intelligence boom is also pushing up inflation.
Although electricity in the United States is mostly generated by abundant natural gas and renewable energy sources rather than oil, massive new data centers are adding so much demand for power that prices have risen nearly 6% from last year. Those computing complexes also need the same memory chips that go into nearly all consumer electronics. As a consequence, computer equipment is becoming more expensive, after getting cheaper for decades.