The ongoing conflict with Iran and the chokehold in the Strait of Hormuz continue to drive consumer prices higher. The latest Consumer Price Index hit a three-year high in May, rising 0.5% on a monthly basis, and a noticeable 4.2% compared with the same month in 2025. For consumers and the housing sector, the surge in inflation spells worsening financial conditions and continued affordability pressures.
Consumer prices jump as energy and shelter lead upswing
While economists expected the increase, it does not diminish the sting for consumers’ pocketbooks. Looking at major categories, energy costs were the main driver of price gains, with double-digit gains for gasoline and fuel oil. Energy services, such as electricity and utility gas, also saw noticeable increases, up 5.9% and 3.0%, respectively.
Food prices, which Americans must handle daily, rose 3.1% from last year, with restaurant prices seeing a 3.5% gain. Similarly, housing costs increased at an annual rate of 3.4%, an acceleration from last month. Given that shelter accounts for 33% of the total CPI basket of prices, the gain highlights that price levels are likely to remain elevated for an extended period.
Several other price categories also saw notable year‑over‑year increases, including apparel (4.8%), transportation services (4.1%) and medical care (3.6%). Used cars and trucks (- 2.0%) and medical care (-1.8%) were the only price categories notching yearly declines.
Looking at core inflation, which excludes food and energy, prices rose 2.9% year‑over‑year, posting a slight acceleration from April. The surge in price gains runs counter to the Federal Reserve’s focus and efforts over the past year and a half to keep inflation contained closer to the 2% target. These numbers will feature prominently in the central bank’s deliberations at the Open Market Committee’s meeting, under the leadership of the new Chairman, Kevin Warsh.
Implications for households and housing markets
The current reacceleration in inflation threatens the key driver of economic output: Consumer spending. While economists argue about overall versus core inflation, or what a “natural” level of inflation is appropriate given structural versus cyclical shifts in the economy, the bottom line for Americans is that prices have been rising unabated for a decade.
Crucially, after giving households a breather during the pandemic period with more substantial gains, wages have fallen behind inflation over the past year. While inflation is running at 4.2%, wage growth has slowed to a range of 3.4% to 3.6%. For many consumers, the sharp decline in purchasing power, coupled with high borrowing costs and current prices leads to painful financial choices each month between making the rent or car payment versus scaling back on the food budget.
Housing markets are wrestling with affordability as we move into the summer season, after a glacial spring start. Following the trajectory of the 10-year Treasury, mortgage rates have trended higher. The Freddie Mac and Mortgage Bankers Association 30-year fixed rates hovered around 6.5% for the past three weeks, while other sources are showing rates closing in on 6.7%. Even as home buyers have slowly been accepting rates above 6.0% as the new normal, being able to save for a downpayment and making the math work amid an environment of elevated prices remains challenging.
Another important implication of resurgent inflation is linked to housing providers. Many owners and managers of rental homes experience similar financial pressures on the operating side, especially related to energy costs. Coupled with higher wholesale prices for materials and services, operators are looking at higher repair, maintenance and capital improvement costs. In addition, developers and builders are bracing for cost escalations for materials, which may impact project budgets and timelines.
Key Takeaways
The May inflation data underscores that the economy is moving in a critical period, where continued pressures on consumers’ finances may lead to a sharper pullback in spending. We have been laboring through a K-shaped economic reality, with higher-income households carrying the load of retail spending. With wages sagging and consumer debt near record high, however, the question is how much more financial pressure can middle-income consumers bear.
For the Federal Reserve, the ongoing developments are stirring echoes of the late 1970s and early 1980s. That period experienced inflation moves at a double-digit pace in 1974-75, retreat in 1976, and subsequently surge even higher in 1979-81 before the central bank stepped in with massive interest rate hikes to tame it.
The new Chairman of the FOMC faces a razor-sharp edge as he balances the pressure from the administration to lower interest rates and spur investment with the threat that rebounding inflation may extinguish consumers’ ability to maintain economic momentum.