- U.S. inflation rose to 4.1% in May, according to a new Commerce Department report.
- The Iran war continues to be the main driver for consumer price increases.
- Gas prices are down from earlier peaks, but still up 20% over last year.
A Thursday federal report finds U.S. consumer prices continued to move up in May, rising at an annual rate of 4.1% — the highest level since April 2023 — as fallout from the Iran war continues to impact the cost of basic necessities and a broad array of goods and services.
The latest Personal Consumption Expenditure Index from the U.S. Commerce Department shows elevated fuel prices were the main contributor to May’s inflation hike as the rate gained 0.4% on a monthly basis. Core annual inflation, which strips out volatile food and energy prices, rose to 3.4% in May, up 0.3% month to month.
On a monthly basis, housing and utilities costs rose 0.3% in May, healthcare costs were up 0.4% and grocery prices rose by 0.1%.
The PCE reading is the Federal Reserve’s preferred inflation measure and the May data is likely to only add pressure for the U.S. central bank to address persistent consumer price increases.
The monetary body has taken a pause on interest rate adjustments so far this year after ending 2025 with three straight rate cuts. In January, forward-looking statements from the Fed suggested two more rate reductions could be in the offing in 2026. That optimism, however, has evaporated in the face of supply shock impacts, particularly in the petroleum industry, since the U.S. and Israel launched attacks on Iran in late February.
Newly installed Fed chairman Kevin Warsh vowed that the fight to move inflation back to the body’s target annual rate of 2% was ongoing, but didn’t go as far as saying that the effort would include an interest rate increase.
Interest rate adjustments are the Fed’s primary tool for maintaining its dual mandate of maximum employment and price stability. Generally speaking, higher rates raise the cost of debt, slow the economy and reduce inflation. Lower rates reduce the cost of borrowing and boost the jobs sector.
“Inflation is at a 3-year high due to the war in Iran and it’s painful for middle-class and moderate-income Americans,” Heather Long, chief economist at Navy Federal Credit Union, told CNBC on Thursday. “People are spending more on gas, along with healthcare and utilities. New Fed chair Kevin Warsh has made his commitment clear to bring inflation down. The key will be how much relief happens by September.”
What’s going on with gas prices?
Wholesale and consumer fuel prices have eased significantly since the start of peace talks, but average gas prices in the U.S. are still running 20% higher than a year ago.
On Thursday, the average price for a gallon of regular across the country was $3.92, down from $4.51 a month ago but up from $3.23 this time last year, according to AAA. Utah drivers continue to see pump prices running well ahead of the national average with a gallon of regular going for an average $3.99 across the state Thursday. That’s down from $4.14 per gallon last week but up from $3.38 last year.
During a Thursday interview, Chevron chief financial officer Eimear Bonner told CNBC’s "Squawk Box Europe" that the company expects U.S. gasoline prices to fall as the Middle East situation continues to normalize.
“What I would say is, we’re all concerned about prices,” Bonner said. “So, there is a lot of empathy, whether it’s in the U.S. or here in the U.K. or in Europe for consumers
“It’s going to take time though. There is a lag between, you know, oil prices and reductions in oil prices and when that shows up at the pump, but we expect that prices will come down as things continue to normalize.”