The U.S. inflation rate has returned to over 4% for the first time in three years, and the Federal Reserve may maintain high interest rates for longer.

Driven by the rise in energy costs triggered by the Middle East conflict, overall inflation in the United States accelerated again in May, but the core indicators that measure potential inflation pressures rose less than expected. Data released by the U.S. Bureau of Labor Statistics on Wednesday showed that the Consumer Price Index (CPI) in the United States rose by 0.5% month-on-month and 4.2% year-on-year in May, both in line with market expectations. The 4.2% year-on-year increase not only exceeded the 3.8% increase in April, but also reached the highest level since April 2023, indicating that the U.S. inflation rate has returned to above 4% for the first time in three years. However, after excluding volatile food and energy prices, the core CPI rose by 0.2% month-on-month and 2.9% year-on-year in May. While the core CPI year-on-year increase was in line with market expectations, the month-on-month increase was lower than the market's expectation of 0.3%, indicating that although underlying inflation pressures have rebounded somewhat, the extent of the increase is lower than the market had previously feared. The surge in energy prices was a key driver of the acceleration of overall inflation in the United States in May, with the energy index contributing over 60% of the overall CPI increase that month. Data showed that the seasonally adjusted energy inflation in the U.S. rose by 3.9% month-on-month in May (compared to 3.8% in April). Among them, the inflation of energy commodities rose by 6.7% month-on-month (compared to 5.6% in April), gasoline inflation rose by 7% (compared to 5.4% in April), and fuel oil inflation rose by 3.8% (compared to 5.8% in April). In terms of year-on-year increases, energy inflation in May rose by 23.5% year-on-year (compared to 17.9% in April). Among them, the inflation of energy commodities rose by 40.6% year-on-year, gasoline inflation rose by 40.5% year-on-year, and fuel oil inflation rose by 58.9% year-on-year. Although the report details show a relatively mild side - transportation services, health insurance, and new car prices all fell, this is not enough to bring much comfort to consumers. Economists expect prices to continue to rise in the future, which may lead Federal Reserve officials to continue to consider the possibility of raising interest rates this year. The latest inflation data is expected to strengthen the Federal Reserve's stance of maintaining policy rates at high levels for a longer period of time, despite the overall CPI data meeting expectations and the core CPI month-on-month increase being lower than expected, alleviating Wall Street's worries about the prospect of Fed rate hikes. Following the release of the May CPI data in the United States, the prices of gold and silver rose in the short term, the increase in international oil prices narrowed; the declines in the three major U.S. stock index futures also narrowed, with Dow futures falling by 0.55%, S&P 500 index futures falling by 0.58%, and Nasdaq futures falling by 0.89%, all of which had previously fallen by more than 1%. The CPI data released today and the PPI data to be released tomorrow are expected to affect the Fed's policy stance. Currently, the market believes that it is almost impossible for the Fed to raise interest rates at the meeting next week, with a slightly higher than 10% probability of a rate hike in July. The focus in the short term is whether the Fed will clearly shift its stance from a preference for easing to a neutral or tightening stance at the upcoming meeting. Brian Jacobsen, Chief Economist at Annex Wealth Management, said that meeting expectations with inflation data does not necessarily mean it is a good report. He stated that the overall inflation data does not show much evidence that the rise in energy commodities is penetrating into core prices. Whether through force or ceasefire, the countdown clock to opening the Strait of Hormuz is ticking loudly. The Fed will not speculate on when this will happen, so President Trump needs to bring certainty to them before the meeting. But there is little sign that the Strait of Hormuz will return to normal traffic in the short term, meaning that continued inflation pressure from the rise in energy costs is expected. Moreover, even if the conflict can be quickly resolved, higher levels of energy costs may persist until the normal oil production returns. In addition to the impact of energy prices, disruptions in the fertilizer market may eventually lead to higher prices for groceries, while rising transportation costs could push up prices for various consumer goods. It is worth noting that U.S. inflation has exceeded wage growth for the second consecutive month, which may have a negative impact on overall economic growth. Mark Hamrick, Senior Economic Analyst at Bankrate, expects that inflation will remain high in the short term due to disruptions in the Middle East supply chain, indicating that the trend of inflation surpassing wage growth may continue. Economists at Zip Recruiter point out that wage growth below the inflation level is putting economic pressure on middle-income families. The sharp rise in the cost of living is undoubtedly a major political burden for Trump and his party as they try to retain control of Congress in the midterm elections in November. Tiffany Wilding, economist at The Pacific Investment Management Company, pointed out that the key question is whether current inflation is being driven by negative supply shocks or by robust demand in the economy. She believes that the overall inflation data tends to point to supply-side pressures, especially those caused by developments in the Middle East and rising gasoline prices. However, the core inflation data raises more questions, making the overall situation less clear. Alexander Lis, Chief Investment Officer at SD Ventures, stated that the overall U.S. CPI data for May met market expectations, both in terms of year-on-year increases and core data were basically in line with expectations. While the data is not strong, it is also not enough to make the market feel reassured. He added that this is the last release of inflation data before the Federal Reserve Monetary Policy Committee meeting this month, so the most important thing now is the Fed's response. The market is about to find out whether inflation is high enough to prompt the Fed to signal a potential interest rate hike, which could determine market trends in the coming months.