U.S. inflation outlook points to faster May CPI growth as energy costs rise

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U.S. inflation May CPI outlook

Highlights

May CPI is expected to accelerate to 4.2% year-over-year, the fastest rise since April 2023, driven primarily by an 8.8% increase in gasoline prices to $4.60 a gallon.
Core CPI is forecast to climb 2.9% annually and 0.3% monthly, with markets watching for energy-driven spillover into broader services and Fed policy implications.
Persistently high inflation is set to outpace wage growth for the second month, raising concerns that households will draw on savings and reduce consumption in H2 2024.

May inflation forecasts and price drivers

As reported by Reuters, economists expect the Labor Department's Consumer Price Index data for May to show annual inflation accelerated to 4.2%, which would be the strongest increase since April 2023 after a 3.8% rise in April. Monthly CPI is projected to have risen 0.5% following a 0.6% gain in the prior month, with higher energy prices seen as the main driver.

Data from the U.S. Energy Information Administration showed the national average gasoline price rose 8.8% in May to $4.60 a gallon. Energy costs climbed after the Middle East conflict disrupted markets, though some price pressure has eased in recent weeks amid a ceasefire.

Core CPI, which excludes food and energy, is forecast to increase 2.9% from a year earlier after 2.8% in April, while the monthly core reading is seen at 0.3%. Economists say the key question for markets is whether higher fuel costs are spilling into broader services prices, a shift that could strengthen expectations for tighter monetary policy.

Fed implications and pressure on households

The inflation outlook adds to the case for the Federal Reserve to keep interest rates unchanged, even as financial markets have started to price in the possibility of a rate hike. The central bank targets 2% inflation based on the Personal Consumption Expenditures Price Index, and current inflation measures remain well above that goal.

Analysts also warn that real incomes are under strain as inflation is likely to exceed wage growth for a second consecutive month. That trend suggests households may have to rely more on savings to maintain spending, which could weaken consumption in the second half of the year.

The expected inflation report follows stronger-than-anticipated U.S. job growth in May and an unemployment rate that remained at 4.3% for a third straight month. Economists are divided over other price pressures, including tariffs and artificial intelligence-related demand for technology goods, though weaker used vehicle prices have helped limit broader goods inflation.

Our previous coverage of the May U.S. CPI forecast highlighted expectations for headline inflation to re-accelerate to 4.2% year over year, with higher energy prices linked to the Middle East conflict seen as the main driver. It also noted that core inflation was projected to edge up to 2.9% annually, while investors watched for signs that rising fuel costs could spill over into broader price pressures and influence market sentiment and policy expectations.

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