By Tom LoBianco | Quincy News Correspondent
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Washington (Quincy News) — Inflation accelerated in May, according to federal data released this week, raising concerns that cost pressures remain persistent and could complicate the Federal Reserve’s plans for interest-rate cuts later this year.
Inflation rose to 4.2% in the 12 months through May, up from 3.8% in April, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI) report released Wednesday. Core inflation, which excludes food and energy prices, increased to 2.9% from 2.8% over the same period. Higher energy costs and the effects of the Iran war appeared to be placing pressure on prices across the economy.
But a possible peace agreement, announced Friday in a post on X by Prime Minister Shehbaz Sharif, a mediator in the Iran war, offered hope that the conflict and the closure of the Strait of Hormuz may end soon, which could begin alleviating a key driver of price hikes.
“Certainly, the main component of inflation right now is the result of the war in Iran,” David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, told Quincy News. But Kass said the lingering effects of tariffs, now largely accounted for, and the AI investment boom, with hundreds of billions of dollars spent on data centers and new supply chain bottlenecks, were both key drivers of the ongoing growth in inflation.
Any optimism tied to reports of a possible Middle East peace agreement would still need to be tempered with the reality of extensive price shocks yet to ripple through the economy, Ball State University economist Michael J. Hicks told Quincy News.
“The world is in an unprecedented oil supply shock that is just beginning to affect supply across the United States. Most of the developed world has tapped their oil reserves and we are currently exporting the excess supply we held in our Strategic Petroleum Reserves,” said Hicks, director of the Ball State Center for Business and Economic Research. “This is a risky effort to keep prices low, but we can only continue to keep prices low until late June or early July, after which we are likely to see spiraling energy prices.”
Hicks, who has pointed routinely to the U.S. being in a modern period of stagflation, with high prices and slow growth, said he could see the Federal Reserve being forced to act sooner on interest rates.
“At the current level of unemployment and price level increases, we should expect the Fed to begin raising rates this summer and continue for at least a year,” he said. “A 100-basis point increase is not out of the question by the end of the year.”
New Fed Chair Kevin Warsh will face significant pressure at next week’s Federal Open Market Committee (FOMC) meeting, his first as the central bank’s leader.
Kass, who previously advised a Federal Reserve governor, said he expected that the board would likely extend a honeymoon period for the new chair and not take action on interest rates next week, but that persistent inflation could spur the Fed to hike rates at the end of the year.
A longer-term debate under way, which Kass noted, could be over how inflation is measured and presented to the public. He pointed to Warsh previously expressing support for relying on the Personal Consumption Expenditures (PCE) index and other “trimmed mean” measures of inflation, which exclude some of the most volatile price movements. During his Senate confirmation hearing, Warsh said he preferred using trimmed-mean measures.
Warsh may also face pressure from President Donald Trump, who repeatedly urged the Federal Reserve to lower interest rates during Jerome Powell’s tenure as chair. The administration’s often-contentious relationship with Powell included a criminal investigation that was later dropped.
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