Inflation across the U.S. accelerated in May as the shock to global energy supplies from the Iran war continued to push prices higher.

The Consumer Price Index rose at an annual rate of 4.2%, up from 3.8% in the prior month and marking the highest level since April 2023.

By the numbers

Economists polled by financial data firm FactSet predicted inflation in May would rise at an annual rate of 4.2%. 

The CPI, a basket of goods and services typically bought by consumers, tracks changes in prices over time.

Inflation has accelerated from an annual rate of 2.4% in January to a three-year high, driven largely by the energy shock stemming from the Iran war. The closure of the Strait of Hormuz has disrupted global supply chains, driving up prices on everything from gasoline to airfares.

In its May report, the Labor Department said energy prices accounted for more than 60% of the monthly CPI increase. Gasoline prices jumped 40.5% from a year earlier.

To be sure, fuel prices have eased slightly in June, as the CBS News gas and oil price tracker shows. However, that decline is not captured in the May data.

Food at home, which captures grocery costs, rose 2.7% from a year earlier. Tomato prices surged 32%, while lettuce jumped almost 25%. Coffee prices, which have been a sore spot for American consumers and coffee chains, rose 17.5% from a year earlier. 

Core inflation, which excludes the more volatile food and energy categories, rose at an annual rate of 2.9%, up slightly from 2.8% in April.

What the experts say

Household budgets are under pressure due to rising inflation, which is outpacing wage growth, said Elizabeth Renter, senior economist at NerdWallet, in a Wednesday email. Three-quarters of Americans said their incomes aren't keeping up with inflation, according to a recent CBS News poll.

"Consumers are paying more for essentials, and they can feel powerless to mitigate this pain," Renter said.

Still, the inflation report wasn't entirely bleak. Outside of categories directly affected by the Iran war, there are signs that some prices are easing, suggesting inflationary pressures aren't yet spreading across the economy, experts say.

For instance, prices for some goods fell for the first time in 14 months, with new vehicles, household furniture and prescription drugs among the categories posting declines last month, said EY-Parthenon chief economist Gregory Daco in an email. 

Those price dips could be "a sign that the bulk of tariff-related passthrough appears to be behind us," Daco wrote. 

Core inflation ticked up just slightly, indicating that higher energy prices aren't spilling into other categories for now, aside from airfare, according to Daco.

May could represent a 2026 peak for the inflation rate, which could ease later this year, Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said in a research note.

"With gas prices down sharply so far in June, May could mark the peak for headline CPI, although inflation will be slow to decline," she said, adding that core inflation has also likely peaked but could remain elevated.

What does this mean for Fed rate cuts?

The inflation surge has upended expectations for the Federal Reserve's interest-rate path. In January, economists had largely focused on when the Fed might next cut rates.

But now, the surge in prices — as well as a stronger labor market —  has some analysts predicting that the central bank's next move could instead be a rate hike.

For now, Fed officials are expected to leave borrowing costs unchanged at their next policy meeting, set for June 17, as they assess whether the inflationary spike will prove persistent. CME Group's FedWatch tool, a measure of financial market sentiment, shows a 96% likelihood that the central bank will hold its benchmark rate steady next week.

"The Fed will be in no position to cut rates if this continues," said Chris Zaccarelli, chief investment officer for Northlight Asset Management, in an email. "More importantly — and the market has started to react to this possibility — the Fed's next move may need to be a hike, and not a cut as many had expected coming into this year."