U.S. inflation surges to a three-year high of 4.2% in May, driven primarily by a 40% spike in gas prices since the start of the Iran war. With wage growth at only 3.4%, real earnings are falling, and consumer sentiment has hit a record low. President Trump reacted by saying he "loves the inflation," while the Federal Reserve is now expected to consider raising interest rates to cool the economy.
Inflation surge details
- ▪May's inflation report marked the third consecutive monthly increase in consumer prices
- ▪With annual wage growth at 3.4%, real average hourly earnings for workers fell by 0.3% in May due to the 4.2% inflation rate
- ▪Core inflation, which excludes volatile food and energy costs, rose to 2.9% year-over-year in May
- ▪The U.S. annual inflation rate, as measured by the Consumer Price Index, rose to 4.2% in May 2026, the highest level since April 2023
Federal Reserve rate outlook
- ▪The Federal Reserve, which targets a 2% inflation rate, is scheduled to hold a monetary policy meeting on June 16-17, 2026
- ▪Due to persistent inflation, financial markets now anticipate the Federal Reserve could raise interest rates by the end of the year
- ▪The upcoming Federal Reserve meeting will be the first presided over by new chair Kevin Warsh
Gas prices rising
- ▪Since the Iran war began on February 28, 2026, U.S. regular gas prices have climbed 40%
- ▪Gas prices rose 7% in May, following a 5.4% rise in April and a 21.2% surge in March
- ▪Blockades in the Strait of Hormuz during the Iran war have limited the global oil supply, choking off about a fifth of the world's supply
Energy costs impact
- ▪Rising energy prices accounted for over 60% of the monthly increase in the consumer price index for May
- ▪The overall energy index rose 3.9% in May, following increases of 3.8% in April and 10.9% in March
- ▪Higher jet fuel costs contributed to a 2.7% jump in airline fares in May, which are up nearly 27% year-over-year
Consumer sentiment decline
- ▪In May 2026, President Donald Trump stated, "I don’t think about Americans’ financial situation" when discussing the war in Iran
- ▪A Verasight poll found that 80% of American adults believe an annual inflation rate higher than 3% is "unacceptable."
- ▪The University of Michigan’s consumer sentiment index fell to 44.8 in May, its lowest level in the survey's 70-year history
Inflation expectations rising
- ▪President Trump predicted inflation will "come down like a rock" once the war with Iran is over
- ▪On June 10, 2026, President Donald Trump reacted to the inflation report by saying, "I love the inflation."
- ▪President Trump also claimed the U.S. has been "taking out millions of barrels of oil" from Iran, a statement Energy Secretary Chris Wright said he was not aware of
- ▪An economist at the Competitive Enterprise Institute identified President Trump's tariffs and the Iran war as the two main avoidable causes of rising prices
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