The Iran war has driven up fuel prices, raising concerns that inflation will spread to other products and become persistent. May's report may fan those fears.

What To Expect From Wednesday's Report On Inflation

Key Takeaways

The Consumer Price Index likely rose 4.2% over the year in May, the highest annual inflation in three years.
The Iran war has driven up fuel prices, hurting household budgets and raising concerns that inflation will spread to other products and become persistent.
A report in line with expectations could add pressure on the Fed to raise interest rates later in the year.

The economy is starting to feel like 2021, and not in a good way.

A report on the Consumer Price Index from the Bureau of Labor Statistics is due out on Wednesday. Economists expect it to show the cost-of-living measure rose 4.2% over 12 months ending in May, according to a survey of forecasters by Dow Jones Newswires and The Wall Street Journal.1 If economists' predictions prove to be true, that would be the largest increase since April 2023.2

"Core" prices, which exclude the volatile costs of food and energy, are expected to have risen 2.9% over the year, up from 2.8% in April.

A report in line with expectations would show inflation following a trajectory similar to that in the immediate aftermath of the pandemic. And it is for a similar reason: supply chain disruptions are pushing up prices for important commodities, especially fuel, and those price hikes are spreading to other products. This time, however, the largest disruption is not COVID-19 but the Iran war's restriction of oil and other resources.

"The inflationary effects of the Iran conflict continue to ripple through consumer prices," economists at Wells Fargo led by Tom Porcelli wrote in a commentary.3 "Higher costs of necessities continue to pinch consumers."

What This Means For The Economy

Rising inflation a one of the biggest threats to the health of the overall economy, since it can hurt consumer spending and could force the Federal Reserve to slow down growth by raising interest rates.

The report could also have implications for the Federal Reserve's interest rate policy. A jump in prices could put further pressure on the central bank to raise its key interest rate, pushing up borrowing costs across the economy to discourage spending and counter rising inflation.

That could be especially true if the price hikes are widespread and not limited to gasoline, indicating that higher transportation costs are being passed on to consumers.

"Evidence of broader pass-through would add to concerns about inflation persistence," Jim Reid, head of macro research and thematic strategy at Deutsche Bank, wrote in a commentary.

Related education

[What Is the Consumer Price Index (CPI)?

CPI ](https://www.investopedia.com/terms/c/consumerpriceindex.asp) [Inflation: What It Is and How to Control Inflation Rates

](https://www.investopedia.com/terms/i/inflation.asp)

The Fed meets next week to set monetary policy, the first meeting for incoming Fed Chair Kevin Warsh. The central bank is widely expected to keep the fed funds rate steady as it waits to gauge how sharp and persistent the war's impact on prices is, and how the labor market holds up amid rising uncertainty.4

In recent months, some Fed officials have become more vocal about the possibility of rate hikes later in the year, especially as the job market has held firm amid intensifying concerns about inflation. The Fed's dual mandate from Congress requires it to keep core inflation running at a 2% annually and employment high.

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MarketWatch. "U.S. Economic Calendar."
Bureau of Labor Statistics via Federal Reserve Economic Data. “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average.”
Wells Fargo. "Economics Week Ahead."
Federal Reserve. "Meeting calendars, statements, and minutes (2021-2027)."

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