Inflation Surges To Three-year High As Iran Fighting Drags On

President Donald Trump’s inflation headache is only getting worse.

The Labor Department on Wednesday reported that prices climbed at an annual rate of 4.2 percent in May — the first time it has topped 4 percent in three years — driven by spiking energy costs triggered by the war with Iran.

Energy prices have surged by more than 23.5 percent from a year ago, according to the Bureau of Labor Statistics. Fuel oil has increased by almost 60 percent. And so-called core inflation — which strips away volatile food and energy prices — rose to 2.9 percent.

Democrats jumped on the news as a sign that Trump has fallen short on his campaign promise to address the high cost of living.

Rising inflation is “a direct consequence of Donald Trump’s failed economic agenda, driven by his chaotic tariffs and illegal war with Iran,” Sen. Elizabeth Warren (D-Mass.) said in a statement.

While inflation has continued to climb, the May increase was generally in line with economic forecasts. White House spokesperson Kush Desai said in a statement that the "at-expectation May CPI report reinforces that, despite temporary disruptions as a result of Iran’s efforts to subvert the free flow of energy, President Trump’s broader economic agenda continues to deliver meaningful results for the American people.”

Still, the threat of rising prices has basically eliminated the likelihood that newly confirmed Federal Reserve Chair Kevin Warsh will be able to bring down short-term interest rates anytime soon, as Trump has demanded. Market participants have priced in a 67 percent probability that Fed rates will be higher at the end of the year, according to CME Group’s FedWatch tool.

The effects of rising energy costs on the U.S. economy have been relatively tame, particularly compared to Europe and Asia, but the increase in fuel prices poses a major political challenge for Trump and Republicans as they prepare for a midterm election campaign that will be dominated by affordability issues and flagging economic sentiment. Gas prices have fallen from their recent peak, but they’re still more than 33 percent higher than they were a year ago. Trump’s approval rating is near a record low, according to a Reuters/Ipsos poll of registered voters, and just 22 percent approve of how he’s managed cost-of-living issues.

Soaring energy prices have pushed up overall inflation since the U.S. and Israel launched attacks on Iran in late February. Prices were increasing at an annual rate of 2.4 percent on the eve of the conflict, according to the Labor Department’s inflation gauge, and the effective closure of the Strait of Hormuz, through which 20 percent of the world’s oil and gas supply flows, has strained global inventories.

And the outlook hasn’t improved amid signs that the war with Iran could escalate. Iran shot down an Army Apache helicopter near the Strait of Hormuz earlier this week, which prompted retaliatory strikes from the U.S.

Trump posted Wednesday on Truth Social that Iran would “have to pay the price” for taking too long to negotiate a deal, a message that pushed up oil prices and sent stock futures tumbling.

And the uptick in inflation linked to energy is coming amid concerns that the investment surge around artificial intelligence will also put upward pressure on prices in the near term.

“We feel confident this is going to be inflationary in the short term,” said Brian LeBlanc, a senior economist and managing director at PNC, describing the effects of AI. It’s possible the technology will lower inflation over time — it may make businesses and workers more productive — but those effects may be muted by rising housing and energy costs, he added.