US inflation tops 4% for first time in 3 years, reviving rate-hike talk

US consumer prices surged past 4% for the first time in three years, driven by an energy price spike tied to the war with Iran and a stronger-than-expected labor market. The combination has shifted market attention from the prospect of rate cuts to the possibility of rate hikes — a backdrop that grew more politically charged after President Donald Trump told reporters he "loves inflation."

The US Department of Labor said Wednesday that the consumer price index rose 4.2% in May from a year earlier, up 0.4 percentage points from April's 3.8% and the highest reading since May 2023. On a monthly basis, prices climbed 0.5%. The figure matched market expectations but extended a two-month streak of elevated gains. Energy prices drove the increase, rising 3.9% in May alone and surging 23.5% from a year earlier — accounting for more than 60% of the overall CPI gain.

Core CPI, which strips out volatile food and energy prices to reflect underlying inflation trends, was relatively contained. It rose 0.2% from the prior month and 2.9% from a year earlier. The annual rate matched forecasts, while the monthly reading came in below the expected 0.3%.

Some analysts suggested May could mark the peak of this inflation cycle. David Kelly, chief global strategist at JPMorgan Asset Management, told Bloomberg TV that "May has the potential to be the high point of inflation in this cycle," adding that the softer-than-expected core reading "is a signal that price pressures are gradually easing."

Markets remained on edge, however, because inflation and employment are strengthening at the same time. May nonfarm payrolls, reported earlier, rose by 172,000 — far exceeding the market forecast of 80,000 — while the unemployment rate held at a low level.

A labor market that refuses to cool even as prices rise gives the Federal Reserve less justification to cut rates. Rate futures markets have rapidly priced out expectations for cuts this year. Investors now treat a rate hold at the Federal Open Market Committee meeting June 16-17 as a near-certainty. With fears growing that a prolonged US-Iran war could keep energy prices elevated, some market participants have begun pricing in the possibility of a rate hike before year-end.

Shortly after the CPI release, Trump met reporters at the White House and, when asked about concerns over rising prices, said: "The numbers were great. I love inflation." The remark, made on the day inflation hit a three-year high, immediately sparked controversy.

Trump then said inflation "will drop sharply once the war is over" and said the United States is expanding oil supply through the Strait of Hormuz, claiming that US military escorts for vessels transiting the strait have added more than 100 million barrels of crude to the market. As criticism mounted, he told the New York Post that he had been referring to inflation figures that would improve after the war ends, saying his comments had been "taken out of context."