US Inflation Rises in May as Energy Prices Soar
Annual inflation in the United States surged to its highest level in three years in May, reaching 4.2%. This spike was driven by the escalation of conflict in the Middle East, which triggered a sharp rise in global energy prices.
According to data from the US Department of Labour released on Wednesday (10/6), the Consumer Price Index (CPI) increased from 3.8% in the previous month. This 4.2% figure marks the highest level since April 2023, confirming significant price pressures resulting from energy supply disruptions in conflict zones.
The energy sector contributed more than 60% of the monthly CPI increase. The war in Iran has pushed average petrol prices to a four-year high, reaching US$4.56 per gallon at the end of May, according to AAA data. Although prices briefly eased to around US$4.15, the petrol index recorded a 7% increase within a month and rose by more than 40% compared to last year.
On the other hand, core inflation—which excludes volatile food and energy categories—rose by 2.9% annually. This figure was slightly higher than the 2.8% recorded in the previous month but remained in line with economists’ expectations.
Separate reports indicate a tangible impact on households. Inflation has now exceeded annual wage increases for two consecutive months. Inflation-adjusted hourly earnings fell by 0.7% in May, meaning public purchasing power is being further eroded for essential needs such as housing, food, and fuel.
Joe Brusuelas, chief economist at RSM, assessed that although annual inflation may be approaching its peak, the lingering effects of high energy prices will still be felt. “There is a lag effect on other categories, coupled with massive investment in the Artificial Intelligence (AI) sector causing supply chain bottlenecks, which will also exert upward pressure on prices,” he stated.
This inflation data presents a major challenge for the Federal Reserve (The Fed), which is set to hold a meeting under the leadership of the new Chair, Kevin Warsh. The US central bank now faces overlapping inflationary shocks, ranging from trade tariffs and energy costs to the AI investment boom.
The solid labour market conditions, combined with heating inflation, provide strong reasoning for Fed officials to maintain high interest rates. Market participants, who previously hoped for rate cuts this year, are now beginning to bet that the Fed may need to raise interest rates by the end of the year to dampen price pressures.
In global markets, uncertainty in the Strait of Hormuz is expected to continue pressuring world energy markets. In a domestic context, these fluctuations have the potential to put pressure on the rupiah exchange rate as the US dollar strengthens due to the Fed’s tight monetary policy.