US Inflation Rises in May as Energy Prices Soar

United States annual inflation surged to its highest level in three years in May, reaching 4.2 per cent. The jump 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 Labor released on Wednesday (10/6), the Consumer Price Index (CPI) rose from 3.8 per cent the previous month. The 4.2 per cent figure is the highest recorded since April 2023, confirming significant price pressures resulting from energy supply disruptions from the conflict zone. The energy sector accounted for more than 60 per cent of the monthly CPI increase. The war in Iran pushed the average price of petrol to a four-year high of US$4.56 per gallon at the end of May, according to AAA data. Although prices eased to around US$4.15, the petrol index was recorded surging 7 per cent in a month and rising more than 40 per cent compared to the prior year. Meanwhile, core inflation, which excludes the volatile food and energy categories, rose 2.9 per cent annually. This figure is slightly higher than the 2.8 per cent recorded the previous month but remains in line with economists’ expectations. A separate report showed the real impact on households. Inflation has now outpaced annual wage growth for two consecutive months. Inflation-adjusted hourly earnings fell 0.7 per cent in May. This means public purchasing power is increasingly eroded for essential needs such as housing rent, groceries, and fuel. Joe Brusuelas, chief economist at RSM, assessed that although annual inflation may be approaching its peak, the knock-on effects of high energy prices will continue to be felt. He noted there is a lag effect on other categories, combined with massive investment in the artificial intelligence (AI) sector causing supply chain bottlenecks, which will also exert upward pressure on prices. This inflation data poses a major challenge for the Federal Reserve (The Fed), which will soon convene a meeting under the leadership of its new Chairman, Kevin Warsh. The US central bank is now facing overlapping inflationary shocks, ranging from trade tariffs and energy costs to the AI investment boom. The still-solid labour market combined with heated inflation provides a strong rationale for Fed officials to maintain high interest rates. Market participants who previously anticipated interest rate cuts this year are now beginning to bet that The Fed may have to raise rates by year-end in order to dampen price pressures. In the global market, uncertainty in the Strait of Hormuz is expected to continue depressing world energy markets. Converted to a domestic context, this fluctuation has the potential to exert pressure on the Indonesian rupiah exchange rate in line with the strengthening of the US dollar due to The Fed’s tight monetary policy.