Gas prices are displayed at a Westar gas station in Miami, Fla., in May. On average, prices at the pump rose from about US$4.04 in mid-April to US$4.49 in mid-May.Marta Lavandier/The Associated Press
Rising gas prices pushed U.S. inflation to its highest level in three years last month, a headache for the Federal Reserve and a potential political challenge for the Trump administration as midterm elections near.
Consumer prices rose 4.2 per cent in May from a year earlier, the Labor Department said Wednesday, up from 3.8 per cent in April and the third straight monthly increase. On a monthly basis, prices rose 0.5 per cent last month, after big gains of 0.6 per cent in April and 0.9 per cent in March.
Prices have now risen faster than wages for several months, pressuring many Americans’ finances and causing consumers to take a decidedly dim view of the economy. Families are dipping into savings to maintain their spending, and more people are falling behind on their credit card bills. Large retailers say they have also noticed changes in customer behaviour, like buying smaller amounts of gas during visits to the pump.
Inflation is now well above the Federal Reserve’s 2 per cent target, which it has surpassed for more than five years. New Fed chair Kevin Warsh will preside over his first policy meeting next week, when the central bank is expected to keep its key interest rate unchanged. But the Fed is also likely to change the statement it issues after each meeting to remove a suggestion that its next move could be to lower rates. With inflation proving stubborn, financial markets expect the Fed could instead raise rates by the end of the year.
When the Fed lifts rates, over time it can make mortgages, auto loans, and business borrowing more expensive.
Fed to hold rates this year, cut calls fade as war inflation persists, economists say
Outside energy costs, price increases last month were not as dramatic, a sign that sharply higher inflation hasn’t yet spread throughout the economy. Should the Iran war end and oil and gas prices decline, headline inflation could begin to cool. Gas prices have fallen this month, though they remain elevated.
Excluding the volatile food and energy categories, core prices rose at a more modest pace. On a monthly basis, they climbed just 0.2 per cent, down from a 0.4 per cent gain in April. Compared with a year ago, they have rise 2.9 per cent, up from 2.8 per cent in April.
President Donald Trump praised the inflation report in comments to reporters Wednesday, saying, “the numbers were great” and “I love it.”
He said the inflation data was good because it showed energy prices were a huge driver of rising costs – the government said they accounted for more than 60 per cent of the monthly increase – and he suggested inflation would ease “as soon as this war is over.”
However, the U.S. launched more air strikes against Iran on Wednesday, and Trump said more were coming, as Tehran fired back at countries in the region.
Crude prices shot back above US$90 a barrel on the violent exchange of fire.
Still, many goods and services rose in price last month: Clothing costs increased 0.3 per cent and are 4.8 per cent more expensive than a year ago. Airline fares, pushed higher by pricier jet fuel, jumped 2.7 per cent just in May and are nearly 27 per cent higher than a year ago. Electricity prices rose 0.6 per cent in May and are up 5.9 per cent in the past year.
Grocery prices were tamer in May compared with previous months, rising just 0.1 per cent from April. Still, they are up 2.7 per cent from a year ago and have risen sharply since the pandemic.
Inflation had been cooling before Trump imposed sweeping tariffs in April 2025, which lifted the costs of many goods. Prices have since surged after the Iran war made oil and gas more expensive, making affordability a key political issue.
Small businesses are struggling with higher costs, some of which they are passing on in the form of higher prices. Others have slowed hiring or even cut jobs.
Gas prices rose in May because of Iran’s closure of the Strait of Hormuz, which has choked off about a fifth of the world’s oil supply. Prices at the pump rose, on average, from about US$4.04 in mid-April to US$4.49 in mid-May, according to the Energy Information Administration.
They have since fallen back to US$4.16 on average nationwide, according to AAA, which could lead to a cooler inflation reading in June. That doesn’t mean gas prices are not prominent in the minds of most Americans. A gallon of gas has hovered above US$4 a gallon since March.
Major retail chains have discounted prices to accommodate customers who are watching their spending more closely.
Stubbornly high inflation has shifted the debate among Fed policymakers, who had signalled at the start of the year that they were inclined to cut their key rate twice more this year. Now, more officials are saying they expect the Fed’s next move will likely be a hike rather than a cut.
Despite higher inflation, the job market appears to be improving, with hiring increasing to a healthy level in May, and the economy is still growing. These positive signs suggest the Fed doesn’t need to cut rates to stimulate growth and hiring. They also signal that the Fed’s rate isn’t so high that it is weighing on the economy. Yet some officials want rates to cool growth a bit, because that can bring down inflation.