Dive Brief:

• Consumer prices jumped 4.2% in May — the highest level in three years — as a near-total blockade of oil shipments through the Strait of Hormuz pushed up energy prices, according to data released by the Bureau of Labor Statistics on Wednesday.
• Rising energy prices generated more than 60% of the inflationary pressure last month, the BLS said. The so-called core consumer price index, excluding energy and food prices, increased in May by 0.2% and 2.9% on an annual basis, still well above the Federal Reserve’s 2% target.
• If the strait “remains disrupted through the Labor Day weekend, we would expect the energy shock to affect additional sectors and heighten uncertainty about the future path of monetary policy,” LPL Financial Chief Economist Jeffrey Roach said Wednesday. “Rate expectations could be further upended if this crisis lasts throughout the summer,” he said in a note.

Dive Insight:

Although fueled mostly by rising energy prices, inflation has begun to erode gains in real wages in recent years and weaken consumer purchasing power for all goods and services.

Real average hourly earnings, seasonally adjusted, fell 0.7% in May compared with a year earlier, the BLS said Wednesday in a separate report.

A 58.9% surge in the price of fuel oil and 40.5% jump in the price of gasoline accounted for most of the 23.5% rise in overall energy costs, according to BLS data.

Although the prices of apparel and transportation on an annual basis increased 4.8% and 4.1%, respectively, gains in the prices of some categories of goods either slowed or reversed, the BLS said.

The price of used cars and trucks and medical care commodities declined on an annual basis by 2% and 1.8%, respectively, while the price of new vehicles rose just 0.2%, according to the BLS.

Still, businesses and consumers face the prospect of higher price pressure from the highest tariffs since the 1930s and soaring investment into artificial intelligence.

Also, a flare-up in fighting between the U.S. and Iran in recent days threatens to prolong constraints on oil exports through the strait.

Amid signs of stubborn inflation, traders in interest rate futures see 67% odds that Fed policymakers will increase the benchmark rate this year by at least a quarter percentage point, an increase from 14.3% odds a month ago, according to the CME Group’s FedWatch tool.

The central bank’s policy-setting Federal Open Market Committee is scheduled to meet June 16-17 in its first meeting under the leadership of newly appointed Chair Kevin Warsh.

Futures traders see 98.3% odds that the FOMC will hold the federal funds rate at its current level — 3.5% to 3.75%.

“For next week, expect the Fed to remain on hold while removing any bias toward additional easing,” Roach said.