U.S. inflation data seen topping 4% as energy costs lift May CPI

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US inflation May CPI outlook

Highlights

Economists expect May CPI to rise 0.5% month-over-month and 4.2% year-over-year, the highest annual rate since April 2023.
Higher energy prices after the Iran war drive headline inflation up, while core CPI is projected to increase 0.3% in May to an annual 2.9%.
Investors fear inflation pressures beyond oil could persist, with supply disruptions and broadening cost drivers potentially weighing on equities if CPI exceeds forecasts.

May CPI forecast and inflation drivers

As reported by CNBC, economists expect the consumer price index report due Wednesday morning to show a 0.5% monthly increase in May and a 4.2% annual inflation rate. If confirmed, that would be the first time the CPI has risen above 4% since May 2023 and the highest reading since April 2023.

Much of the expected increase in the headline figure is tied to higher energy prices following the Iran war. Headline inflation stood at 3.8% in April, compared with 2.4% a year earlier.

Core inflation, which excludes food and energy, is also expected to edge higher. According to Dow Jones estimates cited in the report, core prices are projected to rise 0.3% in May, taking the annual core rate to 2.9% from 2.8% in April.

Market concerns and policy implications

Investors are increasingly concerned that inflation pressures are broadening beyond oil, with higher energy costs feeding through the wider economy. Liz Ann Sonders, chief investment strategist at Charles Schwab, said the inflation problem is no longer only about oil, but also reflects money supply dynamics and growing AI-related pressures.

Sonders said investor nervousness is closely tied to inflation risks and warned that a reading above expectations would likely weigh on equities. She also said that even a quick end to fighting in the Middle East may not bring oil prices back to previous lows because production has already suffered significant disruption.

The Trump administration says inflation should ease quickly once the conflict settles, but the durability of supply damage remains a key uncertainty. The Bureau of Labor Statistics is scheduled to release the CPI report at 8:30 a.m. ET on Wednesday.

Our earlier article on the U.S. Treasury’s growing reliance on short-term T-bill issuance explained how persistent deficits and elevated inflation are making long-term borrowing relatively costly. It noted that while money market demand has absorbed roughly $500 billion in weekly bill rollovers so far, heavier issuance increases sensitivity to rate hikes, with federal interest expenses already rising quickly as short-term rates feed through.

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