US inflation hit a fresh 40-year high in May, unexpectedly accelerating in a broad advance that pressures the Federal Reserve to extend an aggressive series of interest-rate hikes and adds to political problems for the White House and Democrats.

The consumer price index increased 8.6 per cent from a year earlier, Labor Department data showed Friday. The widely followed inflation gauge rose 1 per cent from a month earlier, topping all estimates. Shelter, food and gas were the largest contributors.

The so-called core CPI, which strips out the more volatile food and energy components, rose 0.6 per cent from the prior month and 6 per cent from a year ago, also above forecasts.

The figures reinforce that inflation is still heated by many measures, and that the Fed - which has committed to half-point hikes at each of its next two meetings, starting next week - will have to maintain that aggressive stance through its September gathering. Record gasoline prices and geopolitical factors threaten to keep inflation high in the coming months, suggesting the Fed will have to pump the brakes on the economy for longer.

Two-year Treasury yields jumped, stock futures fell and the dollar rose after the report. Traders fully priced in three 50-basis-point rate hikes over the Fed’s next three policy meetings in June, July and September.

In May, prices for necessities continued to rise at double-digit paces. Energy prices climbed 34.6 per cent from a year earlier, the most since 2005, including a nearly 49 per cent jump in gasoline costs. Gas prices so far in June have climbed to new highs, signaling more upward pressure in coming CPI reports and therefore keeping the Fed in the hot seat.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Grocery prices rose 11.9 per cent annually, the most since 1979, while electricity increased 12 per cent, the most since August 2006. Rent of primary of residence climbed 5.2 per cent from a year earlier, the most since 1987.

There are growing risks that price pressures in those categories will continue to build. Russia’s ongoing war in Ukraine, as well as stepped-up related sanctions; potential port disruption due to the upcoming West Coast dockworker contract expiration; Covid-related lockdowns in China and drought and could all contribute to higher prices for food and energy.

That likely spells further trouble for President Joe Biden, whose approval ratings have sunk to new lows ahead of midterm elections later this year. While the job market remains a bright spot, decades-high inflation is crippling confidence among the American people and largely outpacing wage gains.

Inflation-adjusted average hourly earnings fell 3 per cent in May from a year earlier, the biggest drop since April 2021 and the 14th straight decline, separate data showed Friday.

Furniture, including bedding, was one of the few categories to post a monthly decline. Prices for goods such as apparel, meanwhile, continued to climb, contributing to the stronger-than-forecast core figures.

Before the report, economists had already revised up their estimates for year-over-year inflation through the third quarter of 2023, according to the latest Bloomberg survey.

Airfares rose 12.6 per cent in May, a slight moderation from the prior month but still up the most on an annual basis since 1980. Prices for hotel stays, meanwhile, were up 22.2 per cent year-over-year. Rising demand for travel and entertainment this summer, particularly among wealthier households who have the savings to support discretionary spending, as well as tight labor market conditions will likely maintain upward pressure on services inflation in the coming months.

So far, consumer spending has held firm in the face of inflation, supported by savings and credit cards. Some economists fear that could falter or that the Fed will go too far in tightening policy, either of which could result in a US recession in the next year or so. BLOOMBERG