American consumers are feeling the strain as US inflation hit a three-year high of 4.2% in May, driven by the energy shock from the ongoing war in Iran, according to data from the Bureau of Labor Statistics.
The rise from 3.8% in April marked the third consecutive month of accelerating inflation, with the cost of petrol, gas and electricity soaring. Overall energy bills were almost a quarter higher than a year earlier, while petrol alone jumped sharply. The average price of a gallon of regular petrol now stands at $4.15, up from $2.98 on 28 February, when President Donald Trump launched strikes on Iran.
“US inflation hit a three-year high of 4.2% in May, driven by energy costs from the Iran war.”
In response to those strikes, Iran effectively closed the Strait of Hormuz, a waterway that typically handles about a fifth of the world's oil and gas. The resulting supply disruption has sent energy prices spiralling. Meanwhile, food prices rose 3.1% and core inflation – which excludes volatile food and energy – climbed 2.9%, the BLS reported.
Higher inflation raises the likelihood of the US Federal Reserve raising interest rates to cool spending. The Fed's long-term target is 2%. The new governor, Kevin Warsh, faces his first rate decision next week. Economists expect rates to stay at 3.5% to 3.75% for now, but warned that further evidence of persistent price rises could force a hike.
The inflation surge also poses a political challenge for Trump and the Republicans ahead of November's midterm elections. Despite promising during the 2024 campaign to cut inflation, Trump said he does not think about the cost of living facing Americans “even a little bit” in the context of the war, stressing: “We can not let Iran have a nuclear weapon, that's all.”
Economists have warned that even with a swift resolution to the conflict, it could take until 2027 for normal flows through the Strait of Hormuz to be restored. The prospect of Americans heading to the polls under the weight of significantly higher prices is now a real one.
European stock markets reacted to the data, with London's FTSE 100 falling 0.5%, Germany's Dax down 0.6%, and France's Cac 40 slipping 0.3%.