U.S. consumer prices climbed at an annual rate of 4.2% in May, a three-year high, as energy disruptions from the conflict with Iran fed into prices. Rather than sounding alarmed, President Donald Trump told reporters he "loved" the inflation because he expects prices to drop sharply once the war ends.
The inflation pressure runs through the Strait of Hormuz, where clashes have squeezed a key shipping route. Trump disclosed a military operation that recently helped move more than 100 million barrels of oil through the strait, but the broader closure is still constraining supply. Rystad Energy estimates the global market is now missing more than a billion barrels of oil because of the conflict.
The persistence of the Middle East conflict and the inflation data have also moved energy and bond markets:
- U.S. crude futures for July rose to $92.68 per barrel, while Brent futures advanced past $95.
- Yields on 10-year government debt climbed above 4.5%, signaling that investors expect inflation to stay elevated.
- Traders are pricing in a 67% probability that the Federal Reserve will raise interest rates by the end of the year, reversing earlier expectations for a rate cut.
The higher cost of living is an immediate problem for the administration heading into the midterm elections. Gas prices have eased a bit over the last month, but higher energy and fertilizer costs can still filter into goods and services that are harder to unwind. Efforts to fully reopen the strait have stalled, leaving consumers and markets waiting for a breakthrough.
