US consumer prices rose 0.5% in May, lifting the headline inflation rate to 4.2% year-over-year, the highest since April 2023, as the Iran War drove a sharp increase in energy costs, though analysts say the print does little to shift the Federal Reserve's wait-and-see posture.
The Consumer Price Index came in broadly in line with Wall Street expectations. Gasoline surged 7% on a seasonally adjusted basis in the month and was up 40.5% from a year earlier, pulling all energy categories 3.9% higher month-over-month and 23.5% higher year-over-year.
Core CPI, which strips out food and energy, rose 0.2% in May, with the year-over-year rate rounding up to 2.9%.
Bank of America said the headline and core prints landed almost exactly where it had forecast, though it flagged a notable divergence between goods and services. Core goods declined 0.1% on the month, driven by softness in household furnishings, new vehicles, and medical care goods. The bank said this likely reflects further evidence that tariff-related price pressures are fading from the sequential data, though it cautioned that renewed goods inflation is possible in the second half of 2026 as Iran war supply constraints deepen.
Core services were a brighter spot for inflation hawks, rising 0.29% month-over-month, above Bank of America's 0.23% forecast. The bank attributed the overshoot to firmer-than-expected rent and owners' equivalent rent readings, which it said may reflect seasonal distortions rather than a broad trend, as well as a sharp jump in airfares still absorbing the Iran-related spike in jet fuel.
For the Fed's preferred gauge, Bank of America now tracks core PCE at 0.27% month-over-month, or 3.3% year-over-year, after revising upward from an initial estimate of 0.17%.
Elsewhere, softness in core goods is a potential sign that businesses are absorbing higher input costs in margins rather than passing them on to consumers, according to Bill Adams, chief US economist at Fifth Third Commercial Bank.
Adams flagged labor-intensive service prices as the most persistent inflation concern. Gardening and lawncare services rose 10.8% year-over-year, home healthcare climbed 7.9%, and nursing home and adult day services gained 4.6%, all reflecting tighter immigration policies that are squeezing labor supply in those industries.
Supercore CPI, which tracks services excluding food, energy, and housing, rose 0.3% in the month and accelerated to 3.7% year-over-year, the highest reading since February 2025.
Both analysts agreed the report reinforces the case for the Fed to stay on hold. Bank of America said the data does little to change the central bank's current stance, noting that upside risks from the Iran conflict remain elevated and core PCE is not showing meaningful improvement. “For the Fed, the big picture is that inflation is considerably above target,” Adams said.
“Much of its overshoot can be attributed to shocks from the Iran War and tariffs. Even so, the Fed will still be uneasy about inflation since it has been over target for half a decade, and since labor intensive service prices continue to put upward pressure on core inflation.”