Inflation cooled in May, but energy still the big driver that’ll likely persist

Trend watch

As expected, weekly U.S. air passenger counts jumped in the past 7-day period to 18.4 million. While much of this week’s increase is seasonal – with many schools now off for summer break – some of it is related to the FIFA World Cup, which kicks off this week.

Roughly a quarter of the fans, or more than 1.2 million, will be foreign travelers visiting the United States specifically to attend games. According to FIFA, residents of the three host countries – U.S., Canada, and Mexico (in order) – were top ticket buyers, followed by England, Germany, and Brazil. 

Our take

The good news is that U.S. gasoline prices appear to have peaked in late May, offering a potential turning point for consumers after a period of sustained increases. The bad news, though, is that the earlier surge in crude oil continues to ripple through the global economy, pushing shipping costs higher—particularly for goods moving out of China—and reinforcing cost pressures across supply chains.

While consumer inflation cooled slightly in May, underlying dynamics remain uneven, with energy continuing to play an outsized role. Price gains were again led by energy and transportation services, underscoring the extent to which fuel-related costs are feeding into broader inflation measures despite some easing in goods prices.

Upstream pressures were even more pronounced, as a roughly 10% increase in energy costs drove wholesale inflation higher in May and on a year-over-year basis. Input costs remain elevated, with wholesale plastic prices rising to near all-time highs, signaling persistent cost pressures that could continue to pass through to finished goods prices over time.

Those wholesale price pressures suggest that, while inflation cooled some in May, the impacts are still cycling through supply chains from increased shipping costs to spiking prices for raw materials, such as plastic resins and fertilizers. It’ll likely linger for months – even if there’s an immediate deal to end the conflict, as it’s expected to take more than six months to get natural gas liquids and crude oil supply replenished to prior levels. Furthermore, some Middle Eastern production facilities will take years to repair. For example, Qatar’s massive liquefied natural gas complex at Ras Laffan, which was crippled by infrastructure damage and shipping blockages, could take three years to be fully repair.

Against this backdrop, there are tentative signs of stabilization in demand. Consumer confidence has rebounded from recent lows as inflation concerns have moderated, while the housing market showed resilience with existing home sales rising and prices increasing for a fourth consecutive month, suggesting that underlying economic activity continues despite ongoing cost pressures.

Bottom line

The U.S. economy appears to be demonstrating resilience despite geopolitical uncertainty. Broader data suggest moderating inflation alongside steady growth, with the recent drop in energy prices offering some near-term relief to consumers and supporting purchasing power.