US: Headline Inflation Climbs to a Three-Year High in May

• The Consumer Price Index (CPI) rose by 0.5% month-on-month (m/m) in May, meeting the Bloomberg consensus forecast. On a twelve-month basis, CPI jumped 4.2% – the fastest rate of growth in three-years.
  • Higher energy costs accounted for over sixty percent of the monthly gain in headline, led by a 7.0% m/m gain in prices at the pump. Food prices rose 0.2% m/m and are up 3.1% on a twelve-month basis.
• Excluding food and energy, core inflation rose 0.2% m/m, or roughly half the increase recorded the month prior and in line with consensus. On a twelve-month basis, core prices were up 2.9% (from 2.8% in April).
• Services inflation rose 0.3% m/m, after a hotter 0.5% m/m gain in April. The deceleration was due to a normalization in primary shelter costs (+0.3% m/m) following April’s stronger reading (+0.5% m/m) that was driven by a lingering statistical quirk related to the Bureau of Labor Statistics not collecting data in October because of the government shutdown.
  • Meanwhile, non-housing services remained on the firmer side, as price growth for both recreational and educational & communication services heated up, while airfares rose another 2.7% m/m. On a twelve-month basis, airfares are up 26.7% – the fastest rate of growth since December 2022.
• Core goods prices fell 0.1% m/m, or its first monthly decline since March 2025, driven by a pullback in medical goods (-0.7% m/m) and new vehicles (-0.3% m/m). On a twelve-month basis, goods prices are up 1.1% or roughly a percentage point higher than before last year’s tariffs were implemented.

Key Implications

• The effects of the Iran war continued to surface in May, with headline inflation climbing to a three-year high. While still relatively contained, cost pressures are starting to be felt beyond just higher prices at the pump, with airfares up over 8% since the start of the war, which is coming atop lingering tariff price effects and still elevated services (ex. shelter) inflation.
• We see core measures of inflation remaining elevated through year-end before drifting lower in H1-2027, supporting the case for an extended Fed pause. The FOMC is very likely to telegraph a “higher for longer” monetary policy stance at next week’s interest rate announcement, by dropping its easing bias and perhaps showing some upward drift in the median fed funds forecast, which currently shows 25 bps of easing this year and next.