Annual inflation rose to a three-year-high of 4.2% in May, underscoring how elevated energy prices are rippling through the US economy, according to new data from the Bureau of Labor Statistics.

Prices rose 0.5% on a monthly basis, driven higher by the US-Israeli war with Iran, the latest Consumer Price Index shows. The higher cost of energy accounted for 60% of the monthly increase.

Overall food prices and grocery prices didn’t rise as fast as they did in April, increasing 0.2% and 0.1%, respectively, versus 0.5% and 0.7%.

Economists were expecting prices to rise 0.5% from the month before and for the annual rate to accelerate to 4.2% from the 3.8% reported in April, according to FactSet estimates.

May’s inflation data highlights the affordability concerns for Americans ahead of the midterms and puts fresh focus on President Donald Trump’s pledge to lower prices.

May’s release is the first inflation report since Kevin Warsh was sworn in as the chair of the Federal Reserve, succeeding Jerome Powell. With inflation moving in the wrong direction and the labor market showing signs of resilience, economists expect the US central bank to keep rates unchanged — or even consider raising them.

The underlying inflation trends are running more muted. The closely watched “core” CPI gauge that strips out food and energy rose a slower-than-expected 0.2% from April, bringing the annual rate to 2.9%.

Overall prices aren’t rising as sharply as they did in March and April; however, the past three months have seen the fastest pickup in price hikes since the April through June period of 2022, when inflation was climbing to a 41-year high.

That’s an unsettling throwback; however, economists say that this bout of inflation isn’t expected to be as bad as the last one – current projections have CPI topping out in the range of 4.5% to 5% this year, as opposed to 9.1%.

Still, the latest shock adds yet another layer of fast-rising prices, further compounding the effects of five years of high inflation. Affordability pressures are building, and Americans are likely to have an even harder time keeping up.

The fast-rising prices are outstripping workers’ paychecks, and that gap is widening: Annual real (inflation-adjusted) wages declined for the second month in a row, with the loss widening to 0.7% from 0.3% in April.

That could further erode Americans’ purchasing power, potentially weakening a critical economic engine in the process.

Stock futures pared some losses after the data report. S&P 500 futures were down 0.45%, compared to being down 0.75% before the report. Treasury yields were unchanged. (CNN)

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