US May CPI Rebounds 4.2%, Fed Rate Hike Odds Rise

Due to the ongoing Iran situation, US inflation broke above 4% for the first time in three years in May, and the inflationary pressure on the public is not yet over.

Data from the US Labor Department showed that the Consumer Price Index (CPI) rose 4.2% year-on-year over the past 12 months to May, up from 3.8% in April.

Warsh succeeded Powell as Fed Chairman last month. Before his nomination in January, he had indicated a preference for rate cuts, but with inflation rebounding, he may need to adjust his stance.

Some Fed officials have signaled that a rate hike could not be ruled out in the short term. Fed Governor Christopher Waller said that if inflation does not fall back, the possibility of future rate hikes should not be ruled out, and proposed adjusting the Fed's regular post-meeting policy guidance to make the probability of rate cuts and hikes equal.

Oil Price Surge Pushes Up Inflation Broadly

This month's price increases were mainly driven by energy prices. Due to the Iran conflict disrupting oil shipments through the Strait of Hormuz, US gasoline prices have risen about 50% cumulatively since January, with a single-month increase of 7.0% in May. The conflict has significantly raised US fuel costs for the third consecutive month.

Excluding volatile food and energy categories, core inflation rose 2.9% year-on-year, in line with market economists' expectations.

Since May 2023, US inflation has returned to the 4% or higher range for the first time. Previously, inflation gradually declined from near-40-year highs (over 9% increase) during the pandemic, but has not yet fallen to pre-pandemic levels.

Inflation Pressure May Persist, Services and New Areas Drive Up Costs

Even if this inflation rebound may be temporary, it will pose a political test for the White House, which has previously touted keeping prices low as a key economic achievement.

The impact of price increases is already visible in daily consumption: energy costs and tariffs are pushing up grocery prices, especially for fresh produce, beef, and other categories, with no signs of easing in the short term. Service-sector inflation, including housing costs, remains above 3%, indicating that the causes of price pressure go beyond tariffs and energy.

Analysts point out that the boom in AI data center construction is also creating new inflationary pressures, driving up prices of semiconductors and consumer electronics, an impact that may last until next year.

Investment firm Evercore ISI's strategic group said in a research note this week that three overlapping inflation pressures currently exist, coming from tariffs, oil prices, and capital expenditure in the AI sector.

Rising Inflation Expectations Pose a 'Self-Reinforcing' Risk

Economists worry that if inflation surges again, US consumers may form the perception that high prices are here to stay. If this becomes widespread, it could create a self-reinforcing effect: workers demanding large pay increases, and businesses potentially raising prices in advance of actual cost increases.

Inflation Above Fed's 2% Target for Five Consecutive Years

US inflation has been above the Fed's 2% target for five consecutive years. Prices had not fully returned to normal levels before being hit by external shocks such as last year's tariffs and this year's Iran conflict, further increasing the risk of persistently elevated prices.

Roth International's chief economist, Bruce Suell, expects inflation to continue rising, as high costs in energy, transportation, food, and fertilizers are still being passed through.

Consumer inflation expectations are also rising. A University of Michigan survey showed that in May, consumers' five-year inflation expectation was 3.9%, well above pre-pandemic levels; a New York Fed survey released on April 8 showed a relatively milder 3.0%, but still significantly above the Fed's 2% inflation target.

London School of Economics economist Professor Charles Rice said that while consumer inflation expectations remain generally stable and most people believe prices will eventually return to normal, this stability has weakened compared to 2018.