Inflation still stubbornly high in May, future rate increase growing more likely: CEI analysis

The Consumer Price Index report for May shows inflation rose 0.5 percent across all sectors, with energy continuing to be a major factor in higher prices. While the president continues to ask the Fed to lower interest rates, job and inflation data suggest a rate increase is now more likely.

CEI Finance and Monetary Policy Analyst Steve Swedberg:

“Inflation remains stubbornly above the Federal Reserve’s target, with elevated energy costs linked to continued instability in the Middle East. At the same time, a stronger-than-expected labor market suggests the economy remains resilient and is not showing signs of an imminent slowdown.

“For Fed Chair Kevin Warsh, this creates a genuine dilemma. The economic data provide little support for lower interest rates, particularly since inflation persists at high levels. Yet President Trump continues to call for lower interest rates.

“The result is a growing tension between economic indicators that suggest restraint and political pressure pushing in the opposite direction. Whether Warsh follows the data or the administration’s preferred policy direction will be one of the defining questions facing the Fed this summer.”

CEI Senior Economist Ryan Young:

“Inflation is not going to reach COVID-era levels of 9 percent, but it will likely stay above 4 percent for a while. The two main causes of rising prices were both avoidable: tariffs and the Iran war. While the president could provide almost immediate relief by scrapping his tariffs, that is unlikely. If the Iran war were to end today, which is also unlikely, that damage would take well into next year to heal. The damage already done to infrastructure and shipping will take several months to rebuild.

“The Federal Reserve is still likely to hold rates steady at next week’s meeting, but a rate increase down the road is now more likely. Three months of good jobs numbers give the Fed some room to raise rates, though slowing GDP growth, again due to tariffs and war, do not make the Fed’s job any easier.”