BlackRock warns May CPI at 4.2% as energy costs fuel inflation fears

The May CPI report is expected to show inflation topping 4% for the first time in three years, driven by surging energy costs from the U.S.-Iran conflict.

BlackRock warned that the May U.S. CPI report, due Wednesday, will likely show headline inflation accelerating to 4.2% year over year, the highest since May 2023, as higher energy costs from the Middle East conflict ripple through the economy.

"If oil prices remain above $100-plus per barrel for another three to six months, we'll start to see more of that pass-through to other parts of the inflation basket," said Adam Schickling, senior economist at Vanguard.

Economists surveyed by FactSet expect the CPI to rise 0.5% in May from the prior month, with the annual rate climbing to 4.2% from 3.8% in April. Core CPI, which excludes food and energy, is forecast to increase 0.3% month over month and 2.9% year over year. Deutsche Bank analysts project a 6.8% jump in gasoline prices alone, which would add significant upward pressure to the headline figure.

The data comes at a critical juncture for the Federal Reserve. While most economists don't expect a rate hike at the June meeting, bond futures markets now price a more than 70% probability of at least one increase by year-end, according to the CME FedWatch tool. A hotter-than-expected reading could solidify those expectations, tightening financial conditions for risk assets including Bitcoin and cryptocurrencies.

The May report marks the first time headline CPI has topped 4% since May 2023, when the U.S. was emerging from the worst inflation spike in four decades. The last time inflation ran above 4% for a sustained period, the Fed delivered 525 basis points of rate hikes between March 2022 and July 2023, pushing the fed funds rate to a 22-year high of 5.25% to 5.5%.

The resurgence is largely attributable to the Iran conflict, which pushed crude oil above $100 a barrel and kept energy costs elevated through the summer driving season. WTI crude has averaged above $105 in the second quarter, up from $78 in the first quarter, according to market data.

The key question for investors is whether energy-driven inflation remains contained to direct impacts such as gasoline and transportation costs, or whether it bleeds into other sectors. Transportation services have already begun absorbing higher fuel costs, and economists at Vanguard say warehousing, retail, and wholesale trade will be areas to watch in the coming months.

At Bank of America, economists forecast a 0.46% monthly increase in headline CPI led by energy, with the year-over-year rate reaching 4.2%. They expect core CPI to cool to a 0.2% monthly gain, reflecting modest core goods inflation and a normalization in rent after an upward adjustment in April distorted the prior month's reading.

Bitcoin faces headwinds as rate-cut bets fade

BlackRock's public flagging of the inflation risk amplifies what institutional investors have been quietly pricing in for weeks. For Bitcoin and the broader crypto market, the stakes are particularly high. As a risk-on asset class, Bitcoin has historically sold off when rate-cut expectations recede. The 72% probability of a Fed rate hike by year-end, up from roughly 50% a month ago, has already weighed on crypto prices.

The University of Michigan's consumer sentiment survey, due Friday, will provide a further read on inflation expectations. In May, consumers said they expect inflation of 4.8% over the next year, a level analysts attribute largely to high gasoline prices.

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