THE NEW YORK TIMES: US inflation jumps as Iran war intensifies price squeeze

US inflation accelerated for a third-straight month in May amid a stalemate in negotiations to end the war with Iran, adding to the price pressures confronting consumers.

The consumer price index rose 4.2 per cent per cent in May from a year earlier, new data from the Bureau of Labor Statistics showed Wednesday. That is up from a 2.4 per cent annual increase before the conflict in the Middle East started in February and is the fastest pace since April 2023. Over the course of the month, overall prices jumped 0.5 per cent.

Energy prices drove the bulk of the increase in May, rising 3.9 per cent over the month. Once those were stripped out alongside food prices, the “core” index rose 2.9 per cent on a year-over-year basis. Core prices rose 0.2 per cent for the month, a 0.2 percentage point decrease from April’s monthly rate.

Energy costs have been spilling into categories where they make up a large chunk of the ultimate price tag, including food and airline fares, which rose 2.7 per cent in May and are up 26.7 per cent since this time last year. Hotel rates also increased 0.5 per cent, in a possible indication of impact from the World Cup, although the hospitality industry has been disappointed in demand for rooms.

For the Federal Reserve, which will vote next week on whether to change interest rates, the most important question is whether stickier categories like manufactured goods and services — the core inflation — are also being affected. This core reading was slightly softer than expected, and it may reassure monetary policymakers that they can stand pat for now, even though the labour market appears to be strengthening.

The war in the Middle East is not the only factor pushing prices up. The data centre boom has created demand for the memory chips that go into nearly all consumer electronics, reversing a long slide in the cost of technology. And a persistent drought has thinned out production of some crops and livestock, especially beef.

The main factor keeping a lid on prices: consumers, who have by now spent their tax refunds and have lately seen smaller increases in their paychecks. Annual increases in average hourly earnings have now fallen behind inflation for two months in a row. If some categories are not accelerating, it could be because shoppers simply lack the ability to pay more.

“Weakening of pricing power tells you something about how the seller was thinking about their final consumer, and that tells you a little bit about growth,” said Atsi Sheth, chief credit officer at Moody’s Ratings. “Despite the still relatively low unemployment, the household’s capacity to consume is eroding.”

This article originally appeared in The New York Times.