President Donald Trump on Wednesday expressed unexpected enthusiasm for the latest inflation data, declaring “I love the inflation” after the Consumer Price Index (CPI) climbed to a three-year high of 4.2% annually in May — the third consecutive monthly increase since the U.S.-Iran war began.

The sharp acceleration in prices, driven overwhelmingly by energy costs linked to disruptions in the Middle East, marks a significant shift from the relatively stable inflation environment that prevailed before the conflict. In February, before hostilities escalated, the annual inflation rate stood at just 2.4%. It rose to 3.3% in March and 3.8% in April, according to data from the Bureau of Labor Statistics released Wednesday.

Energy prices accounted for roughly 60% of the overall monthly increase. The national average price for a gallon of gasoline reached $4.15, according to AAA — still about $1 higher than a year ago, though slightly below last month’s peak. Airline fares surged 26.7% year-over-year, adding further strain on households as the busy summer travel season approaches. Food, energy services, and clothing costs also rose. Stripping out volatile food and energy prices, core CPI increased to 2.9%.

Trump, speaking from the White House, framed the higher inflation as manageable and even positive in the broader context of the conflict. He highlighted U.S. actions against Iranian oil infrastructure and claimed American forces had seized “millions of barrels of oil” without Iran’s knowledge, contributing to lower global prices.

“No, I love it. The numbers were great,” Trump said, before referencing recent military operations: “We took out the other night 22 ships late at night… That’s why oil is at $85 a barrel.”

He also reiterated his long-standing view that confronting Iran’s nuclear ambitions was necessary, despite the economic side effects.

The White House sought to downplay the inflation spike, calling the figures “at-expectation” and attributing them to “temporary disruptions” from Iran’s efforts to restrict energy flows. Spokesperson Kush Desai emphasized positive trends in other areas.

“Prices of prescription drugs, dairy products, cars, as well as both health and auto insurance continue to decline thanks to the Trump administration’s policymaking. The Administration will continue pushing our affordability agenda to enable Americans to keep more of their hard-earned money,” he said.

However, the data paints a more complicated picture. Persistent energy-driven inflation is feeding into broader price pressures at a time when the labor market remains resilient. May’s jobs report showed employers added a surprisingly strong 172,000 positions, with the unemployment rate holding steady at 4.3%. This combination of strong hiring and rising prices complicates the Federal Reserve’s task as it prepares for its first meeting under new Chair Kevin Warsh next week.

Americans are feeling the pinch. A survey from the Federal Reserve Bank of New York released Monday showed households have grown more pessimistic about inflation, job prospects, and the risk of layoffs. The University of Michigan’s consumer sentiment index has fallen for three consecutive months to historic lows, reflecting widespread anxiety over higher costs for essentials.

The energy shock from the Iran war is a key driver. With the Strait of Hormuz largely blocked, global oil prices have remained elevated despite some recent moderation. This has direct consequences for U.S. consumers and businesses, even as the country benefits from its status as a net energy exporter.

Pressure on the Fed and Shifting Rate Expectations

The inflation data intensifies the challenge for the Federal Reserve. Warsh, who has previously aligned with Trump’s preference for lower rates, faces a difficult environment. While the president continues to call for rate cuts, recent developments have shifted market expectations.

Goldman Sachs said on Friday it no longer expects any Fed rate cuts this year, projecting rates will remain unchanged through 2026 before possible easing in 2027. JP Morgan Global Research went further, forecasting potential rate hikes by the Fed in 2027 as energy costs and labor market strength sustain inflationary pressures.

Bruce Kasman, chief global economist at JPMorgan Chase, summarized the evolving debate, noting: “The energy price spike is now raising inflation and generating a sharp squeeze on household purchasing power that could intensify if the Middle East conflict keeps the Strait of Hormuz closed.”

This outlook represents a reversal from earlier expectations of rate easing. Markets are now pricing in roughly a 50% chance of a hike by September, with some analysts seeing two 25-basis-point increases before year-end.

Geopolitical Roots and Long-Term Risks

The current inflation surge is inextricably linked to the U.S.-Iran conflict. Disruptions in the Strait of Hormuz have tightened global energy supplies, pushing up costs for gasoline, aviation fuel, and related goods. While Trump has portrayed U.S. actions as strategically successful, the sustained higher energy prices are transmitting inflation through the economy and complicating domestic policy.

For the Fed, the situation creates a classic policy dilemma: balancing growth risks against persistent price pressures. With the labor market still robust, economists believe the central bank has more room to prioritize inflation control, but prolonged energy shocks could embed higher expectations and make the task harder.

Economically, the war’s impact extends beyond headline CPI. Higher transportation and input costs are rippling through supply chains, affecting everything from food prices to manufacturing. Consumer spending, which drives the majority of U.S. growth, is expected to face further headwinds if real wages are eroded by sustained inflation.

The administration’s messaging seeks to frame the inflation as temporary and manageable, but the data and market reactions suggest a more protracted challenge.