US inflation jumped to 4.2% in May, the third consecutive increase since start of Iran war

• Inflation has risen sharply from 2.4% in February (pre-conflict) to 3.3% in March, 3.8% in April, and 4.2% in May, with core CPI (excluding food and energy) at 2.9%
• National average gas prices reached $4.15 per gallon, while airline fares jumped 26.7% annually, squeezing consumer budgets and pushing consumer sentiment to historic lows
• Goldman Sachs now predicts no Fed rate cuts in 2026, while JPMorgan forecasts potential rate hikes across global central banks if the Strait of Hormuz remains closed

Market Summary: US Inflation Surges to 4.2% Amid Iran Conflict

Key Developments:

US inflation accelerated to 4.2% annually in May 2026, marking the third consecutive monthly increase since the onset of the US-Israel war with Iran. This represents a three-year high, up from 2.4% in February before the conflict began. Monthly progression shows inflation rising from 3.3% in March to 3.8% in April.

Primary Drivers:

Energy prices accounted for 60% of overall monthly increases in the Consumer Price Index. The national average gas price reached $4.15 per gallon—$1 higher than year-ago levels. Airline fares surged 26.7% annually, while food, energy services, and clothing costs also climbed. Core CPI (excluding volatile food and energy) increased 2.9%. The closure of the Strait of Hormuz has been the principal factor affecting energy markets.

Market Implications:

The Federal Reserve, meeting next week under new Chair Kevin Warsh, faces mounting pressure as inflation significantly exceeds the 2% target. Current interest rates stand at 3.5%-3.75%. Despite Warsh and President Trump advocating for rate cuts, major financial institutions have reversed expectations:

• Goldman Sachs no longer anticipates any 2026 rate cuts, projecting unchanged rates throughout the year
• JPMorgan forecasts potential rate hikes if the Strait of Hormuz remains closed

Economic Sentiment:

Consumer confidence has plummeted to historic lows after three consecutive monthly declines. The Federal Reserve Bank of New York reports increased household pessimism regarding inflation, employment prospects, and potential layoffs. The labor market remains resilient with 172,000 jobs added in May and unemployment steady at 4.3%.