The 4.2% inflation rate is a bummer, but the worst might be over

By Jeffry Bartash

Lower gasoline prices and fading tariff effects are likely to nudge U.S. inflation lower by the end of 2026

Elevated inflation is like an extra tax on families.

What goes up must come down - including the rate of inflation. The recent surge in prices may have run its course.

Make no mistake: An inflation rate of 4%-plus, which the U.S. is currently experiencing, represents a big tax on families, businesses and the broader economy. Nor is inflation likely to slow quickly.

Still, there are signs the 4.2% yearly rate of inflation in May could be the high-water mark of the latest bout of inflation.

Start with oil prices. The cost of a barrel of West Texas crude has fallen 19% to around $90 since peaking at nearly $113 in early April.

If oil prices remain at current levels - obviously a big if - the read on consumer prices for June could be notably tamer. Just as important, a rising cost of oil hasn't significantly driven up prices for other goods and services aside from plane fares.

The evidence? The core rate of inflation, which omits energy, rose less than expected in May and is now running at less than 3% a year. The core rate is a better predictor of long-run trends.

What seems to be happening is that businesses, flush with profits, are eating cost increases tied to higher oil prices lest they drive away customers. "This could be a sign that businesses think consumers are unwilling or unable to absorb further cost increases," said chief economist Bill Adams of Fifth Third Commercial Bank.

The Trump tariffs of 2025, meanwhile, appear to be having less and less impact on prices. The Supreme Court has struck down the most onerous tariffs, and the administration is facing more legal challenges.

The diminishing impact of the tariffs is apparent in softer prices for goods - furniture, appliances, new cars and whatnot.

The cost of goods rose 1.1% in the 12 months ended in May, down from a recent peak of 1.5% last fall. Goods prices have barely risen at all this year.

"It appears that the tariff passthrough is complete," contended Stephen Douglas, chief economist at NISA Investment Advisors.

The biggest sore spot is probably the cost of services. The yearly increase in services prices climbed to a 3.4% rate in May from a five-year low of 2.9% in January.

Higher rents, one of the biggest household expenses, has played a chief role. Airfares have surged, too, due to the higher cost of fuel.

A less-noticed contributor has been in increase in services costs tied to the Trump administration's crackdown on unauthorized immigration.

Prices for things like lawn care, pet care and laundry services have gone up more than usual due to a scarcity of labor and continued high demand.

The good news is that labor costs more broadly appear well-contained. Labor is typically a company's biggest expense and the main source of big outbreaks in U.S. inflation.

Rapidly rising labor costs, in fact, were a key factor to soaring inflation after the pandemic.

And now? Wages are growing more slowly, and workers have little bargaining power in an period marked by slow hiring and the rise of artificial intelligence.

Hourly wages rose 3.5% in the 12 months ended in May, matching the smallest increase since just before the pandemic struck in 2020.

Worker pay, in fact, is rising more slowly than prices. And that helps to explain why Americans are so resistant to paying more for goods and services and helping, in an unintended way, to keep a cap on inflation.

Those who drive to work have scant alternative to paying current gas-station prices. But they have a lot more say on most other things they spend their money on.

Does this mean a 2% inflation rate is just around the corner? Not by a longshot.

Yet barring a massive flareup in violence in the Middle East and another spike in oil prices, the latest bout of inflation is unlikely to get much worse.

"If oil prices continue to moderate, [the 4.2% inflation rate in May] will be the peak for the year," wrote chief economist Chris Low of FHN Financial.

-Jeffry Bartash

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06-10-26 1544ET