This Week In The Economy: Inflation Shows No Signs Of Slowing Down, ECB Takes Action, US Small Business Pessimism

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Energy Prices Fuel Overall Consumer Price Inflation In May

The U.S. consumer price inflation story remains one where energy prices are driving the overall surge in headline CPI. The May CPI report again shows the inflationary impact of the Iran conflict, with energy accounting for over 60 percent of the headline spike, as well as a knock-on effect on other important categories like food as well as airfare (up 2.7 percent on a monthly basis).

The unpopularity of AI data centers and their impact on electricity bills will not be helped by this report — electricity costs were up 0.6 percent last month and jumped 5.9 percent compared to a year ago.

Core consumer prices (excluding food and energy) rose at a slower pace in May, but the ongoing tariffs impact — apparel prices (up 0.3 percent month-over-month and +4.8 percent vs. last year), for example — continues.

Expect the Federal Reserve to remain in a holding pattern but drop the easing bias from its monetary policy statement when the Federal Open Market committee meets next week.

The Consumer Price Index in May rose 0.5 percent, compounding the 0.6 percent pace set in April, and +0.9 percent in March. The May CPI reading matched expectations for a 0.5 percent rise.

Over the last 12 months, consumer prices are up 4.2 percent, compared to a 3.8 percent rise in April.

Core CPI, excluding food and energy prices, is up 0.2 percent in May, following a 0.4 percent increase in April. Consumer prices less food and energy rose 2.9 percent from May 2025, following a 2.8 percent year-over-year rise in April.

Energy costs rose 3.9 percent, following a 3.8 percent jump in April — boosted by a 7.8 percent spike in gasoline prices.

Energy prices are up 23.5 percent year-over-year, following a 17.9 percent increase for the 12 months ending April. Gasoline prices soared 40.5 percent last month compared to a year ago.

After a 0.6 percent increase in April, shelter costs picked up by 0.3 percent in May (and are up 3.4 percent year-over-year).

Food prices were up 0.2 percent, after a 0.5 percent increase in April. Grocery prices increased by 0.1 percent on a monthly basis in May and are +2.7 percent compared to a year ago, and restaurant prices rose 0.3 percent and surged 3.5 percent compared to May 2025.

Food prices overall increased by 3.1 percent compared to May 2025, following a 3.2 percent rise in April.

Spike In May Energy Wholesale Prices Seeping Into Other Key Products

May wholesale prices surged at the fastest pace since November 2022 compared to a year ago, fueled by a jump in goods prices. The inflationary impact of the Iran War is clear — energy prices continue to soar, with a domino effect on other categories such as plastic resins and materials and industrial chemicals.

The war is also compounding the knock-on effects of tariffs, as transportation and warehousing services costs rose at a significant rate on a monthly basis and skyrocketed compared to a year ago.

This puts inflation concerns front and center for the Federal Reserve, although a rate hike is unlikely at the June FOMC meeting. The report also means consumer prices will remain elevated in June.

U.S. wholesale price inflation as measured by the Producer Price Index for final demand jumped 1.1 percent in May, matching a revised 1.1 percent rise (previously +1.4 percent) in April, and blowing past expectations for a 0.7 percent increase. Final demand prices were up 0.7 percent in March and 0.5 percent in February.

Compared to May 2025, final demand PPI surged 6.5 percent, compared to a 6.0 percent increase for the 12 months ended in April. Expectations were for a 6.4 percent rise.

May final demand prices excluding food and energy came in up 0.4 percent, following a 0.7 percent rise in April, and are up 4.9 percent from a year ago after a 5.2 percent rise in April.

Final demand prices excluding foods, energy, and trade services saw a 0.8 percent rise in May, following a 0.5 percent rise in April, and a 0.2 percent increase in March. For the 12 months ended in May, prices for final demand less foods, energy, and trade services rose 5.1 percent, compared to a 4.4 percent increase on an annual basis in April.

Prices for final demand goods spiked 2.8 percent — following April’s 1.9 percent jump. Goods prices excluding food and energy rose 0.8 percent, speeding up from a 0.7 percent rise in April. Prices for final demand services increased by 0.3 percent in May, after a 0.7 percent jump in April. Final demand transportation and warehousing services picked up by 2.6 percent following a 3.8 percent rise in April and have soared 14.2 percent compared to May 2025.

Food prices increased 0.6 percent after a 0.2 percent uptick in April, and rose 2.6 percent compared to May 2025. Energy prices soared 10.7 percent in May, following April’s 7.5 percent spike, and are 36.6 percent higher compared to May 2025 (after prices jumped 22.7 percent on an annual basis in April). Gasoline prices rose by 23.4 percent in May.

Inflation Concerns Pushes European Central Bank To Raise Rates

The European Central Bank’s Governing Council this week voted to increase its target interest rates by 25 basis points, seeking to guard against rising inflationary pressures from the Iran conflict.

ECB staff revised up their projections for headline inflation in the Euro Area, saying it will average 3% in 2026, 2.3% in 2027 and 2.0% in 2028. For inflation excluding energy and food, the baseline foresees an average of 2.5% in 2026 and 2027 and 2.2% in 2028.

They revised down their economic growth forecasts to an average of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. This reflects “a more pronounced impact of the war on commodity markets, real incomes and confidence.”

“Looking ahead, staff now expect domestic demand to be weaker than they projected in March as the war weighs on confidence and higher energy costs erode real incomes,” ECB President Christine Lagarde told reporters at a press conference.

She warned that the risks to the growth outlook are skewed to the downside, as a prolonged disruption of energy supplies could increase energy prices further and for longer than currently expected. These factors would erode real incomes even more and make firms and households more reluctant to invest and spend.

Meanwhile there is risk of a higher rate of inflation, especially if higher energy prices spill over by more than expected to other prices and wages, if longer-term inflation expectations were to rise in response, or if global supply chains were disrupted more broadly.

“Our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission,” she said.

Increased Uncertainty Weighing Down US Small Business Optimism

The cloudy economic outlook, compounded by rising prices, is fueling increased pessimism among U.S. small business owners, causing them to slow down hiring, the National Federation of Independent Business reported this week.

“In May, job openings and hiring plans fell notably to the lowest levels in six years,” the NFIB said, while the number of owners who plan to create new jobs in the next three months fell to the lowest level since May 2020.

Reports of supply chain disruptions picked up in May, with a shift from those reporting no disruptions to those reporting mild or moderate disruptions. Seventy percent of small business owners reported that supply chain disruptions affected their business to some extent, up from April.

In May, reports of both actual and planned price increases rose significantly, with the share of owners raising average selling prices rising to the highest reading since March 2023. The number who plan to increase prices jumped to the highest reading since July 2022.

The share of business owners who cited inflation as their single most important business problem, was the highest reading since December 2024.