May’s CPI report is due Wednesday morning, with economists forecasting year-over-year inflation to climb from 3.8% to 4.2%, the highest reading since April 2023.
The April Consumer Price Index already rattled markets, rising a seasonally adjusted 0.6% for the month and putting the one-year pace at 3.8%, the highest annual headline rate since May 2023.
That April figure marked a half-percentage-point increase from March, signaling that price pressures are broadening well beyond a single sector of the economy.
Energy prices were the single biggest driver in April, jumping 3.8% for the month and accounting for more than 40% of the total headline gain across goods and services.
The 12-month gain in energy prices reached 17.9%, while the gasoline index surged 28.4% annually, hitting consumers hard at the pump and across transportation costs.
Food prices also continued their climb, rising 0.5% in April and putting the 12-month food inflation rate at 3.2%, adding further strain on household budgets.
Shelter costs rose 0.6% after easing in prior months, a troubling sign that inflation is not confined to energy and is spreading into housing-related expenses.
Tariff-sensitive categories showed notable pressure as well, with apparel up 0.6%, airline fares up 2.8% for the month and 20.7% higher year over year, and household furnishings up 0.7%.
Workers bore the brunt of the price acceleration, as real average hourly wages slipped 0.5% for the month and fell 0.3% on an annual basis, the first such setback in three years.
For the first time since 2023, inflation is eating up all wage gains, a direct hit to middle-class and lower-income households already stretched thin by years of elevated prices.
The Federal Reserve finds itself at a difficult crossroads, having held its benchmark interest rate steady all year amid disagreements among policymakers over direction and communication strategy.
In late April, the Fed voted again to hold rates unchanged but recorded four dissents, the highest number of dissents since 1992, reflecting deepening internal divisions over the path forward.
Inflation has now remained above the Fed’s 2% target for more than five years, and current energy price increases layered on top of existing tariffs are intensifying concerns among policymakers.
Some Fed officials have expressed worry that pressure stemming from the Iran war could translate into more persistent and entrenched inflation across the broader economy.
Traders have moved sharply away from pricing in any interest rate cuts, with market expectations now placing a better than 1-in-3 chance of a rate hike by the end of this year.
Market pricing has taken virtually any chance of a cut off the table between now and the end of 2027, a dramatic shift in sentiment following the hotter-than-expected April inflation reading.
A team of Wells Fargo economists expects headline inflation to rise 0.5% from April to May and reach 4.2% on a year-over-year basis when Wednesday’s report is released.
Wells Fargo’s economists also forecast core CPI, which strips out volatile food and energy prices, to rise 0.2% month over month and 2.8% compared to the prior year.
The inflationary effects of the Iran conflict are expected to continue rippling through consumer prices in the months ahead, leaving the Fed with few comfortable options on rates.
