Fed Faces Tough Dilemma as Inflation Surges to 4.2%

Higher oil prices pushed inflation to a new three-year peak in May, complicating the outlook for the Federal Reserve ahead of next week’s policy meeting.

Overall prices increased by 4.2% in the 12 months through May, up from 3.8% in April, according to the U.S. Labor Department’s Consumer Price Index (CPI) data released Wednesday. The May readout matches economist expectations but marks the highest inflation since April 2023. 

The energy index jumped 3.9% in May, after rising 3.8% in April and 10.9% in March, accounting for over 60% of the monthly inflation, according to the report.

Core inflation, which strips out volatile food and energy costs, rose 2.9%, up from 2.8% in April.

Headline inflation measuring overall price changes ticked up 0.6% on a seasonally adjusted basis in May, while core inflation edged up 0.2% from April.

Gasoline of all types jumped 40.5% in the 12 months ending in May and 7% from April, while fuel oil surged a staggering 58.9% annually.

The price of groceries, which are delivered to stores on trucks, increased 2.7% from a year ago last year, while housing costs were up 3.4% over th 12 months through May.

This is the last inflation readout before the June 16-17 Federal Open Market Committee (FOMC) meeting to set rate policy, which will mark the first vote overseen by new Fed Chair Kevin Warsh.

Realtor.com® senior economistJake Krimmel says Wednesday’s CPI data, combined with May’s strong jobs report, makes a Fed pause on rate hikes this month all but certain.

“Looking ahead, the slightly softer core goods picture may give more runway for the Fed to maintain its wait-and-see posture through the summer,” says Krimmel.

However, it’s notable that markets are still pricing a rate hike as the Fed’s next move, but not likely until late 2026 or early 2027. That outlook has put upward pressure on mortgage rates in recent months.

The Fed uses higher interest rates to fight inflation, and lower rates to stimulate the job market, in line with the central bank’s dual mandate of price stability and maximum employment.

Meanwhile, today’s real earnings release confirms the pocketbook story is deepening, with real average hourly earnings falling 0.1% from April to May, and are down 0.7% over the past year. 

Snejana Farberov is a reporter at Realtor.com covering the U.S. housing market and the latest domestic real estate trends. She has worked as a general assignment journalist in New York City and Long Island for 16 years, writing for New York Post, Daily Mail, and News 12. Snejana earned bachelor’s degrees in journalism and Italian from St. John’s University, followed by a master’s degree from Columbia University School of Journalism.