Inflation, as measured by the producer price index, soared eight-tenths of a percentage point to 6.5% for the year ending in May, the Bureau of Labor Statistics reported Thursday, driven by higher energy costs from the war in Iran.
The inflation rate was the highest since November 2022, when inflation spiked under President Joe Biden and doomed Democrats politically.
The rise in producer inflation suggests that faster price gains are also in store for households already hard-hit by the higher cost of living. That is a major warning sign for the economy, and for the political prospects of President Donald Trump and Republicans.
Economists have been closely examining inflation reports, given the war with Iran and fears that the energy price spikes caused by the conflict will translate to higher overall inflation.
INFLATION ROSE TO 4.2% IN MAY, HIGHEST IN THREE YEARS, AS IRAN WAR SPIKED ENERGY PRICES
The index was up 1.1% just in the month of May. The bulk of that increase was driven by higher energy prices, which were up a massive 11% month-to-month.
“[A]t some point the dam is going to break and companies will have to pass the higher energy costs from the Iran conflict on to the consumer,” FWDBonds chief economist Chris Rupkey wrote in a note on the report.
Core PPI inflation, which strips out volatile food and energy prices, rose seven-tenths of a percentage point to 5.1% on an annual basis, the fastest such rate since October 2022. Core inflation was 0.8% on a monthly basis.
The latest numbers come a day after the most closely watched inflation gauge, the consumer price index, once again came in hot.
CPI inflation rose four-tenths of a percentage point to 4.2% for the year ending in May — that marks the highest rate of annual inflation since April 2023. In just the month of May, prices rose 0.5%.
The recent increase has been driven in large part by spiking energy prices, which have risen as the conflict with Iran disrupted global oil supply. Energy prices are up 23.5% on the year, led by soaring fuel oil and gasoline prices.
FED AND WARSH UNDER INCREASING PRESSURE TO KEEP RATES HIGHER, THANKS TO LABOR MARKET STRENGTH
Higher costs of living and challenges with affordability have pushed consumer sentiment to record lows and caused Trump’s approval ratings to fall, making the GOP’s effort to retain control of the House and Senate in November more difficult.
The rate of inflation is also well above the 2% level that the Fed considers to be healthy, and it has greatly reduced the chances that the central bank will cut interest rates at all this year. In fact, many investors are now thinking the Fed will have to hike rates in order to contain this wave of inflation.
