Consumer Price Index May 2026

Inflation breaches 4% on conflict in the Middle East

Headline Consumer Price Index (CPI) rose a solid 0.6% month over month (m/m) in May, slightly above expectations, following strong 0.9% and 0.6% advances in the two prior months. Headline inflation surged 0.4 percentage points to 4.2% year over year (y/y) — its highest level since April 2023 — with energy, transportation and shelter cost inflation accelerating, but it still contained pass-through from the conflict in the Middle East onto core inflation (for now).

Core CPI rose a modest 0.2% m/m, in line with expectations, lifting core inflation 0.1 percentage point to 2.9% y/y. Core goods prices fell for the first time in 14 months, led lower by new vehicle prices, household furniture and furnishings, women’s apparel, prescription drugs, and TVs — a sign that the bulk of tariff-related pass-through appears to be behind us. Core services prices rose 0.3%, with shelter prices rising more than expected, on residual strength in rent prices (up 0.4%), likely associated with data collection distortions stemming from the 2025 government shutdown.

The longer the conflict in the Middle East persists, the broader and more persistent inflationary pressures are likely to become. For now, there appears to be little pass-through of higher energy cost onto core inflation, outside of airfare. Still, we anticipate higher fertilizer prices will place upward pressure on food inflation, while rising transportation and production costs gradually pass through to a wider range of goods and services. Strong AI-related investment will likely continue to support pricing in selected consumer tech products and software categories. The World Cup may also contribute to temporary increases in travel, lodging and leisure-related prices.

We foresee CPI inflation remaining above 4% in June while core inflation approaches 3%. Risks of higher and more persistent inflation remain salient with every day that passes without a resolution to the conflict in the Middle East and a normalization of transit through the Strait of Hormuz.

For a Federal Reserve already concerned about inflation persistence, another firm inflation report will strengthen the case for a more explicit two-sided reaction function, acknowledging that policy could move in either direction depending on the evolution of inflation and labor market conditions.

The June Federal Open Market Committee (FOMC) meeting will be the first under Chair Kevin Warsh. While Warsh is generally perceived as more dovish, he will inherit a Committee that has grown increasingly wary of upside inflation risks. We expect the FOMC statement to adopt a more explicit two-sided formulation, acknowledging that rate hikes could become appropriate should inflation remain above target. Still, with financial markets doing some of the tightening for the Fed and real wage growth contracting, our baseline remains that the Committee stays on hold through year-end.

In the details:

• Energy prices rose 3.9% m/m in May, following a 3.8% advance in April and a 10.9% surge in March. Gasoline prices grew 7.0% on the month and are now about 40% higher than in January. Depending on how the conflict in the Middle East evolves, there is a possibility that gasoline prices could ease slightly on a seasonally adjusted basis in June — relieving some pressure on CPI.
   
• Energy services prices firmed 1.6% m/m, with electricity prices rising 0.6% on output generation pressure, while utility piped natural gas prices declined 0.5%, indicating no effect from the conflict in the Middle East.
   
• Food prices increased a modest 0.2% on the month, driven by a 0.3% increase in restaurant prices, while grocery prices only rose a tick. Looking ahead, higher fertilizer costs are expected to push crop prices higher, feeding into broader food inflation. 
   
• Core CPI increased 0.2% m/m, largely driven by a robust increase in primary rents and transportation costs. The strength in rents likely reflects the residual unwinding of earlier statistical distortions: The government shutdown created a data collection gap in October last year, leading the U.S. Bureau of Labor Statistics to assume no rent growth for that month.
   
• Still, shelter should be monitored closely, as the strong disinflation of the past three years may have run its course. Reduced housing cost disinflation would in turn reduce the buffers against the energy price shocks, inflationary pressure from the surge in AI investment and lingering non-housing services inflation. 
   
• Airfares increased 2.7% m/m in May and are up 27% y/y. Car rental prices fell 4.2% and are down 6.1% y/y. Looking ahead, lingering geopolitical tensions in the Middle East are likely to add further upward pressure through higher fuel cost, which will feed through into transportation prices in the coming months.
   
• Core goods prices fell 0.1% m/m in May. Lower prices for new vehicle, household furniture and furnishings, women’s apparel, prescription drugs, and TVs could be an indication that the bulk of tariff-related pass-through is behind us.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.