MW Inflation is set to top 4% for the first time since 2023 - and the Fed is back in the hot seat
By Jeffry Bartash
CPI to show prices are rising faster than wages
Kevin Warsh, seen here with President Trump after being sworn in as chair of the Federal Reserve, will have to confront the highest U.S. inflation in three years.
The rate of U.S. inflation is primed to top 4% for the first time in three years - and the negative repercussions are likely to be felt for the rest of the year.
Gone is any chance of the Federal Reserve cutting interest rates soon, for one thing. The central bank might even raise borrowing costs in 2026, which would be bad news for businesses, potential home buyers and other consumers seeking loans.
Americans will probably also pay higher prices for fuel at least until the early fall, even if the Iran conflict ends soon. The summer driving season and low global stockpiles of oil are sure to see to that.
What's more, the high cost of oil, along with the residual effects of the Trump tariffs last year, is nudging up the prices of other goods and services. It will take time for these price pressures to ease.
The combination of high prices and slower wage growth means Americans have to make do with less, at least until inflation begins to recede again.
It may be awhile. The consumer-price index for May, due out Wednesday morning, is forecast to increase a sharp 0.5%, almost three times the typical monthly increase.
The yearly rate of inflation is projected to climb to 4.2% from 3.8% in the prior month, reaching the highest level since May 2023.
Inflation is now rising notably faster than pay. Wages and salaries are increasing about 3% to 3.5% a year.
'Core' of the problem?
Oil prices can gyrate sharply, so Fed officials prefer to look at a separate measure of inflation known as the core rate that strips out energy. Changes in core prices are a better predictor of future inflation.
The core CPI is less worrisome, but it's also climbing. The yearly rate of core inflation is forecast to rise to 2.9% in May from 2.8% in the prior month.
Just five months ago, the core rate of inflation had slowed to a five-year low of 2.5% and was moving closer to the Fed's 2% long-term target.
Is the recent increase in prices enough to push the Fed to raise interest rates? Not just yet, most economists and some top Fed officials say.
Typically, Fed officials prefer to wait to see if big price increases in oil are reversed, as is usually the case. The overall rate of inflation tends to slow down once oil prices taper off.
Yet the Fed also has to be on guard against higher energy prices shaping how consumers and businesses view inflation in the long run. If they come to expect rising inflation, sometimes higher inflation becomes a self-fulfilling prophecy.
So far, inflation expectations haven't gotten unmoored. They remain what Fed officials like to call "well anchored."
Goods
The key to how the Fed thinks about the CPI report will depend on the details. Officials are watching closely to see if higher energy prices push up the cost of goods in particular - food, clothes, consumer electronics, appliances and so forth.
The prices of goods excluding energy actually haven't shown much movement this year. They rose at a 1.1% yearly rate in April, the same as in January. Any sustained increase in goods prices would be a worrisome sign.
Services
The cost of services, it turns out, has risen even faster in the past few months.
Americans spend most of their money on services: dining, recreation, entertainment, banking, healthcare and so forth. Any sustained increase in service prices would be bad news for consumers, inflation and the Fed.
In the 12 months that ended in April, the cost of services rose 3.3%, compared with a five-year low of 2.9% in January.
Government shutdown
One caveat: The government shutdown last fall may have distorted the recent uptick in service prices, especially the cost of housing.
Only now is the government getting a better grip on actual price trends in rents and homeownership because of technical problems caused by the shutdown.
The result: Inflation in May could come in below expectations, which would come as a relief to jittery investors.
-Jeffry Bartash
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 09, 2026 09:50 ET (13:50 GMT)
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