US Inflation Reaches 4.2% in May 2026, the Highest Annual Rate Since April 2023
The Bureau of Labor Statistics reported on Wednesday that the consumer price index rose 0.5% in May from April and 4.2% year-over-year. Both figures matched forecasts. The annual rate is the highest since April 2023, and it marks the third consecutive month that US inflation has run significantly above the Federal Reserve's 2% target. The driver is not mysterious: the Strait of Hormuz has been closed since mid-March, and the energy shock from the US-Israel conflict with Iran is working through every corner of the consumer price basket.
Energy is driving almost all of it
Energy prices jumped 3.9% for the month alone, putting the 12-month energy increase at 23.5%. Gasoline is up 40.5% from a year ago. According to the Labor Department, energy accounted for more than 60% of the total monthly CPI gain. That single factor tells most of the story.
Core CPI, which excludes food and energy, rose just 0.2% for the month — below the 0.3% estimate — and 2.9% annually. That reading matters because it shows inflation outside the energy shock is running cooler than expected. Food at home rose 2.7% year-over-year. Shelter costs, which make up more than a third of the CPI weighting, rose 0.3% for the month and 3.4% annually, half the April pace. Transportation services fell 0.6%, suggesting high energy costs have not yet filtered into services broadly.
What the Fed does next
The Federal Open Market Committee meets on June 17. Markets currently price a 96.3% chance that rates stay unchanged at the 3.5% to 3.75% target range, according to the CME FedWatch tool. Kevin Warsh is taking the Fed chair position this cycle, replacing Jerome Powell. Futures pricing now shows no cuts in 2026 at all. At the start of the year, traders were pricing at least one.
April's FOMC minutes showed four of twelve members dissenting — the most since October 1992. One dissenter wanted a cut; three opposed the committee's residual easing bias, preferring a more neutral posture given the inflation trajectory. A majority of officials said "some policy firming would likely become appropriate" if inflation continued running above target. The June 17 press conference will signal how seriously Warsh is weighing that option given the core data came in soft.
Will inflation keep rising?
Oxford Economics lead economist Nancy Vanden Houten wrote that May could represent the 2026 peak. "With gas prices down sharply so far in June, May could mark the peak for headline CPI, although inflation will be slow to decline." Core inflation has also likely peaked, she said, though it could stay elevated.
That view conflicts with the Survey of Professional Forecasters, polled by the Philadelphia Fed before this week's data, which projected Q2 headline CPI at 6%. May's 4.2% print came in well below that estimate, partly because core goods prices fell 0.1% for the month — a sign that tariff pass-through has been more limited than feared. If the Strait of Hormuz remains closed into the third quarter, energy will stay elevated. If it reopens, base effects run in the other direction quickly. The May Producer Price Index, due today, will add more detail on wholesale cost pressures. April PPI ran at a 6% annual rate, the highest since December 2022.