America’s inflation jumps to 3-year high of 4.2%

Feds monitoring shifts to determine interest rate adjustments

Durrant Pate/Contributor

Inflation in the United States has accelerated to a three-year high of 4.2% year-over-year, according to the latest numbers just released by the US Bureau of Labor Statistics (BLS)

This surge is primarily driven by spiking energy costs, with overall energy prices jumping 23.5% amid ongoing geopolitical tensions in the Middle East. Inflation rose by 0.5 per cent in May compared with the prior month, following a 0.6 per cent jump in April.

Cumulative inflation has decreased purchasing power by 20% since 2020. Inflation for May was also driven by a 3.1% increase in food costs, while core inflation, which excludes volatile food and energy and is heavily influenced by shelter and transportation, went up 2.9%.

This latest inflation outturn comes before the US Federal Reserve’s policy meeting next week. With inflation accelerating above the targeted 2% mark, the Feds is actively monitoring these shifts to determine necessary interest rate adjustments.

Fueling prices rising

The price for a gallon of petrol is $4.15 ($1.10 per litre), according to the American Automobile Association (AAA), which tracks US petrol prices. By comparison, it was $2.98 ($0.79/litre) when the US and Israel first struck Iran on February 28.

Oil prices are continuing to rise. Brent crude futures climbed $1.45, or 1.6 per cent to $92.90 a barrel in morning trade on Wednesday. West Texas Intermediate (WTI) crude jumped $1.80, or 2 per cent, to $90 a barrel after touching a session high of $90.42 earlier in the day.

Even if Trump and Tehran reach a deal soon, it is expected to take months to get oil supplies moving, with the disruptions expected through 2026. And while US consumers may be more insulated from fuel shocks than other nations, continuing higher energy prices are beginning to dent spending.

Fed likely response

The increased inflation comes amid the surging likelihood of possible interest rate increases by the Fed. The American central bank will have its first policy meeting under Kevin Warsh, who took over as chairman last month after Jerome Powell’s term ended.

CME Fed Watch, which tracks the likelihood of interest rate hikes and cuts, forecast that rates will remain steady at next week’s meeting but forecasts that rate hikes, not cuts, could be coming in the months ahead. The tracker says there is a 96 per cent chance that rates will remain the same in June at 3.5 per cent to 3.75 per cent. 

However, by October’s meeting, there is a nearly 38 per cent chance rates will increase by a quarter of a percentage point to 3.75 per cent to 4 per cent and an 8 per cent chance that rates will rise to 4 per cent to 4.25 per cent. Goldman Sachs forecasts that rate cuts will not happen until mid-to-late 2027.