U.S. Producer Prices Surge 6.5% on Iran War Energy Shock

U.S. producer prices climbed 6.5% in May from a year earlier, the fastest annual gain since November 2022. The Labor Department said the producer price index rose 1.1% from April, matching the prior month's pace. Wholesale gasoline prices surged more than 23% month over month and nearly 70% from May 2025.

The energy shock traces directly to the Iran war. After the U.S. and Israel attacked Feb. 28, Iran shut the Strait of Hormuz, triggering the biggest disruption in oil supplies in history. That pushed energy prices sharply higher and is now feeding through the wholesale pipeline.

Excluding food and energy, core producer prices rose 0.4% from April and 4.9% from a year earlier. That is still well above the Federal Reserve's 2% target. The consumer price index, reported Wednesday, showed a 4.2% annual gain, the highest in three years. Gasoline prices there were up nearly 41% from May 2025. Airfares rose almost 27%.

The Fed meets next week and is expected to leave its benchmark rate unchanged. Financial markets are pricing in a rate hike by year-end as inflation pressures persist.

S&P Global Energy warned Thursday that U.S. crude oil inventories are drying up as the summer driving season approaches. Aaron Brady, a director at the firm, said inventory levels remain above minimum operating thresholds for now. "However, with continued disruption to Middle East flows, draws are likely to extend into the third quarter, even in the event of a near-term diplomatic resolution." He added that more big, sustained drops in inventories "would likely signal entry into a 'danger zone' for the U.S. refining system."

The sector readthrough splits along energy exposure. Energy producers benefit directly from higher crude and product prices. Refiners face a different calculus: if crude supplies tighten further, margins could compress even as gasoline prices stay elevated. Airlines and transport companies, already paying 27% more for airfares, face further cost pressure if crude stays elevated. Consumer discretionary names tied to travel and spending could also feel the pinch if inflation erodes purchasing power.

How long the supply disruption lasts is the open question. A diplomatic resolution would ease the immediate pressure. S&P Global's Brady said draws are likely to extend into the third quarter even with a near-term deal. The Fed's policy meeting begins next week. The central bank is expected to hold rates steady. Markets are pricing in a hike by December.