US households, businesses stung by higher energy prices

WASHINGTON-Rising gas prices pushed inflation to its highest level in three years last month, a headache for the Federal Reserve and a potential political challenge for the Trump administration as midterm elections near. Consumer prices rose 4.2% in May from a year earlier, the Labor Department said Wednesday, up from 3.8% in April and the third straight monthly increase. On a monthly basis, prices rose 0.5% last month, after big gains of 0.6% in April and 0.9% in March. Prices have now risen faster than wages for several months, pressuring many Americans' finances and causing consumers to take a decidedly dim view of the economy. Families are dipping into savings to maintain their spending, and more people are falling behind on their credit card bills. Large retailers say they have also noticed changes in customer behavior, like buying smaller amounts of gas during visits to the pump. Inflation is now well above the Federal Reserve's 2% target, which it has surpassed for more than five years. New Fed chair Kevin Warsh will preside over his first policy meeting next week, when the central bank is expected to keep its key interest rate unchanged. But the Fed is also likely to change the statement it issues after each meeting to remove a suggestion that its next move could be to lower rates. With inflation proving stubborn, financial markets expect the Fed could instead raise rates by the end of the year. When the Fed lifts rates, over time it can make mortgages, auto loans, and business borrowing more expensive. Outside energy costs, price increases last month were not as dramatic, a sign that sharply higher inflation hasn't yet spread throughout the economy. Should the Iran war end and oil and gas prices decline, headline inflation could begin to cool. Gas prices have fallen this month, though they remain elevated. Excluding the volatile food and energy categories, core prices rose at a more modest pace. On a monthly basis, they climbed just 0.2%, down from a 0.4% gain in April. Compared with a year ago, they have rise 2.9%, up from 2.8% in April. President Donald Trump praised the inflation report in comments to reporters Wednesday, saying, "the numbers were great" and "I love it." He said the inflation data was good because it showed energy prices were a huge driver of rising costs-the government said they accounted for more than 60% of the monthly increase-and he suggested inflation would ease "as soon as this war is over." However, the U.S. launched more airstrikes against Iran on Wednesday, and Trump said more were coming, as Tehran fired back at countries in the region. Crude prices shot back above $90 a barrel on the violent exchange of fire. Still, many goods and services rose in price last month: Clothing costs increased 0.3% and are 4.8% more expensive than a year ago. Airline fares, pushed higher by pricier jet fuel, jumped 2.7% just in May and are nearly 27% higher than a year ago. Electricity prices rose 0.6% in May and are up 5.9% in the past year. Grocery prices were tamer in May compared with previous months, rising just 0.1% from April. Still, they are up 2.7% from a year ago and have risen sharply since the pandemic. "I don't think we're anywhere near out of the woods yet," Omair Sharif, chief economist at Inflation Insights, said. Price increases "were stronger under the hood." Sharif and other economists point out that the cost of services, including child care, home health care, and dental services are still rising much more quickly than is consistent with the Fed's 2% inflation target. Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, attributed some of the gain to a crackdown on immigration, which has likely forced many employers in those industries to raise wages. Inflation had been cooling before Trump imposed sweeping tariffs in April 2025, which lifted the costs of many goods. Prices have since surged after the Iran war made oil and gas more expensive, making affordability a key political issue. Small businesses are struggling with higher costs, some of which they are passing on in the form of higher prices. Others have slowed hiring or even cut jobs. Beth Benike, the founder of Oronoco, Minnesota-based Busy Baby, said her small company was hit hard by tariffs last year and is now struggling with higher shipping costs stemming from more expensive fuel. The company sells silicon placemats and toys that attach to high chairs and strollers. Sales have declined as inflation has worsened, and Benike recently reduced one full-time employee to part-time hours. She said that more of her customers are now grandparents of newborns, rather than the parents.