Import prices rose 1.9% in May, nearly double the consensus estimate

U.S. import prices rose 1.9% in May, nearly double the 1.1% consensus, as fuel costs remained elevated even after the Iran peace deal sent crude oil below $80 a barrel for the first time since March.

"If all of a sudden oil prices were to come down quickly, the headline inflation number will come down, but at the same time, it'll put a lot of money back in consumers' pockets right at a time where they're feeling pretty good, and that's how you can get some more inflation," said Andy Goldberg, chief investment strategist at Nomura Asset Management International.

Fuel import prices climbed 12.5% last month, decelerating from April's 18.6% surge but still running at more than triple the pace of nonpetroleum imports, which rose 0.8%. The 6.7% annual increase in import prices marked the largest since August 2022, when the post-pandemic inflation wave was nearing its peak. The data excludes tariffs and transportation costs, meaning the actual cost burden on importers is even higher.

The reading complicates the outlook for the Federal Reserve as it opens a two-day policy meeting Tuesday. Economists expect the central bank to hold its benchmark rate in the 3.50%-3.75% range but pivot away from an easing bias. With consumer inflation already running at its fastest pace in three years and producer prices posting their largest gain in 3-1/2 years, the import price data reduces the already slim probability of rate cuts in 2026.

The Inflation Transmission Chain

The May import price report arrived as oil markets priced in a rapid de-escalation of the Iran conflict. Brent crude fell 5.06% to settle at $78.96 a barrel, while West Texas Intermediate dropped 5.82% to $76.05 — the first close below $80 for both benchmarks since early March. President Donald Trump announced Sunday that the U.S. and Iran had agreed to terms ending the war, with the Strait of Hormuz set to reopen Friday.

The disconnect between falling oil prices and still-elevated import costs reflects the lag between spot crude movements and the prices paid for finished goods arriving at U.S. ports. Fuel import prices, while decelerating from April, remain at levels that feed through to a broad range of consumer and industrial goods. The last time annual import price inflation exceeded 6% was in the 12 months through August 2022, when the Fed was in the midst of its most aggressive tightening cycle in four decades. The central bank raised rates by 75 basis points at each of four consecutive meetings that year before slowing the pace.

Market Repricing and the Fed's Dilemma

Equity markets showed the tension between the inflation surprise and the oil-driven rotation into cyclical stocks. The Dow Jones Industrial Average rose to a record close of 51,999.67, gaining 0.64%, as investors bet that lower energy costs would re-accelerate the U.S. economy. JPMorgan Chase advanced more than 3%, while Caterpillar added more than 1%. But the S&P 500 fell 0.57% and the Nasdaq Composite dropped 1.15%, dragged down by a selloff in semiconductor stocks after a Bank of America fund manager survey showed 80% of respondents viewed semiconductors as the most crowded trade — the highest reading in the survey's history.

The cross-asset divergence captures the Fed's dilemma. Lower oil prices ease headline inflation mechanically, but they also put money back in consumers' pockets at a time when the labor market remains resilient. Nonfarm payrolls added 172,000 jobs in May, well above the 85,000 consensus, keeping the unemployment rate at 4.3%. A consumer-led re-acceleration in demand could keep core inflation sticky even as energy costs moderate.

Markets now face the prospect that Chair Kevin Warsh, in his first policy meeting, will deliver a hawkish hold — keeping rates steady while pushing back against any expectation of near-term easing. Overnight index swaps have already repriced to reflect a lower probability of cuts through year-end. The next key test comes with the June consumer price index release on July 15, which will show whether the import price pressures are transmitting into the broader economy.

This article is for informational purposes only and does not constitute investment advice.