May CPI Report: Energy-Driven Inflation Is Contained, for Now

The Bureau of Labor Statistics reported that the Consumer Price Index increased 4.2% in May from year-ago levels after increasing 3.8% in April. Year-over-year core CPI (which excludes volatile food and energy costs) rose 2.9%, outpacing the April rate of 2.8%.

Overall inflation rose 0.5% month over month after rising 0.6% in April. Core inflation rose 0.2%, matching the April increase.

Economists had expected CPI to rise 0.5% on a monthly basis and 4.2% year over year in May, according to the FactSet consensus. Core CPI was expected to come in up 0.3% on a monthly basis and up 2.9% year over year.

The key question is whether inflation fueled by the Iran war supply shock stays contained or spreads to the broader economy. “Overall, this report may be slightly comforting for the Federal Reserve, given milder core inflation. But it’s not too late for high energy prices to spread into the rest of the index,” says Preston Caldwell, senior US economist at Morningstar.

May CPI Inflation Report Highlights

• CPI rose 0.5% for the month after rising 0.6% in April.
• Core CPI rose 0.2% after rising 0.4% in April.
• CPI increased 4.2% year over year after increasing 3.8% the prior month.
• Core CPI rose 2.9% from year-ago levels after rising 2.8% in April.

Overall energy prices increased 3.9% after rising 3.8% last month, while utility gas prices fell 0.5%, fuel oil prices increased 3.8%, gasoline prices rose 7.0%, and electricity prices increased 0.6%.

“Based on current prices and market expectations, May should be the peak for energy prices,” Caldwell explains. He says gas prices have already fallen around $0.30 per gallon as of this Monday, compared to their peak in late May, and oil futures prices suggest a drop through the second half of 2026. ”As it stands, we should see a large drop in CPI energy when the June data is released. However, current market and futures prices are arguably predicated on a high probability that the Strait of Hormuz will begin reopening within the next month."

Food prices increased 0.2% in May after increasing 0.5% in April. Grocery prices rose 0.1%, while restaurant prices increased 0.3%. Shelter prices rose 0.3% in May after rising 0.6% in April.

Economists at Bank of America noted an unexpected soft reading on core goods, which fell 0.1% in May. “This was broad-based and driven by declines in household furnishings and supplies, new vehicles, and medical care goods,” they wrote. “Some of this is likely further evidence that tariffs are no longer playing a large role in the sequential inflation data. That said, we think we could see renewed core goods inflation in [the second half of] 2026, due to the Iran war and emerging supply constraints.”

Fed Seen Still Waiting and Watching

With the May CPI coming in close to forecasts, expectations for Fed policy were little changed. The central bank is expected to keep rates unchanged at its June meeting but raise them before the year-end. However, economists said there was good news in the CPI report about the Iran war’s near-term impact on inflation.

“For now, core inflation readings are reassuring,” wrote Don Rissmiller, chief economist at Strategas. “It is still possible, if the Strait of Hormuz opens fully, that this inflation will be ‘transitory.’ But US monetary policymakers will almost certainly want to see data supporting that view before relying on such an outcome. The textbook policy response is to look through supply shocks, as long as long-run inflation expectations stay stable. Each sequential hot inflation print we get threatens that anchor, however, and discomfort has been growing based on recent speeches by FOMC members. ”

Morningstar’s Caldwell says the Fed will want to be certain that inflation from the energy spike is contained before signaling an all-clear: “We’d need many more months of favorable data, along with a definitive resolution for the Iran war, to rule out rate hikes in the next 12 months.”

What Is the CPI?

The Consumer Price Index is a mainstream measure of inflation that tracks changes in consumer prices for a wide variety of goods and services, including food, housing, healthcare, and energy.

The CPI report is widely followed by investors, but it isn’t the only way to keep track of inflation. When it comes to the Federal Reserve’s decisions on interest rates, the focus is generally on the Personal Consumption Expenditures Price Index. The Fed targets a 2% inflation rate based on the PCE inflation index, not the CPI. However, the CPI generally makes front-page news because it is released earlier than the PCE and contains much of the same information. Both reports are released on a monthly cadence.