The Consumer Price Index climbed 4.2% year-over-year in May, its highest reading since April 2023. Energy prices accounted for more than 60% of the monthly increase.
The Iran war's disruption of global oil markets is the central driver. Energy prices surged 23.5% over the past year, with a 3.9% monthly jump carrying most of the weight.
Gasoline prices rose 40.5% from a year earlier. Fuel oil climbed 59% year-over-year, and airline fares followed, up 27%, a direct pass-through of higher jet fuel costs.
Food prices are compounding the pressure. Tomatoes cost 32% more than a year ago, lettuce jumped roughly 25%, and coffee prices climbed 17.5% year-over-year, per CBS News.
The Strait of Hormuz closure has disrupted global nitrogen fertilizer supply chains, driving up crop production costs.
Beef and veal prices rose 13% over the same period. Concerns are also growing that the New World screwworm could add further strain to the US cattle industry.
"Americans are getting squeezed financially by inflation that's back at a 3-year high," said Heather Long, chief economist at Navy Federal Credit Union. Long said gas, food, electricity, and medical care are all above 3% inflation and clear pain points for Americans.
Three-quarters of Americans say their incomes aren't keeping up with rising prices, according to a CBS News poll. Headline inflation has accelerated from 2.4% in January to 4.2% in May.
Core CPI rose 0.2% for the month and 2.9% annually, with the monthly gain coming in below the 0.3% forecast.
New vehicle prices fell 0.3% and prescription drug costs also declined. Gregory Daco, chief economist at EY-Parthenon, said those drops may signal that "the bulk of tariff-related passthrough appears to be behind us."
Transportation services fell 0.6% on the month, per CNBC, suggesting higher energy costs haven't yet spread broadly into service-sector pricing.
Nancy Vanden Houten, lead US economist at Oxford Economics, said May could mark the 2026 inflation peak, noting that gas prices have already eased in June. She cautioned that any decline will be slow.
Markets are pricing a 96% probability the Federal Reserve holds rates steady at its June 17 meeting. It will be new Chair Kevin Warsh's first policy decision.
The Fed's next move may need to be a hike rather than the cut many had expected at the start of the year, said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
Futures markets currently point to a rate increase in December. Warsh has signaled he believes artificial intelligence productivity gains could have a disinflationary effect over time. That thesis remains untested against a war-driven energy shock.
On Wednesday morning, President Trump warned on Truth Social that Iran would "pay the price" for slow nuclear deal negotiations. That signal suggests the conflict driving this inflation surge is far from resolved.
