US inflation accelerated in May, supported by rising energy costs, according to data released on Wednesday, marking the largest annual increase in three years.

The US Consumer Price Index (CPI) rose 4.2% year-over-year in May, in line with market expectations and reaching its highest level in three years.

On a seasonally adjusted monthly basis, the index increased 0.5% from the previous month, also matching Dow Jones estimates.

Core inflation, which excludes the more volatile food and energy categories, showed some moderation. It rose 0.2% on a monthly basis, below expectations for a 0.3% increase.

On an annual basis, core inflation came in at 2.9%, matching analysts’ forecasts but remaining above the Federal Reserve’s 2% target.

The data suggests inflationary pressures remain present in the US economy, particularly as higher energy prices linked to geopolitical tensions in the Middle East continue to feed into broader price trends. This could encourage the Federal Reserve to maintain a restrictive monetary policy stance for longer.

Following the release, US stock futures remained in negative territory, while Treasury yields were little changed, reflecting continued investor caution regarding the outlook for interest rates and US monetary policy.

US Consumer Price Index data for May showed inflation rising in line with economists’ expectations, reviving concerns about the future path of US interest rates and their impact on risk-sensitive assets, particularly cryptocurrencies.

In trading, Bitcoin fell 0.1% to $62,200 as of 14:43 GMT on CoinMarketCap.

Inflation data revives rate-hike concerns and crypto market volatility

Annual inflation accelerated to 4.2%, its highest level since April 2023.

Core inflation, which excludes food and energy prices, rose to 2.9%, its highest reading in nine months and also matched market expectations.

The figures are viewed as concerning for financial markets, particularly because the Federal Reserve considers a 2% inflation rate to be its long-term target.

According to The Kobeissi Letter, expectations for future interest-rate increases have started to rise again, potentially triggering additional selling pressure in the cryptocurrency market, which remains highly volatile and sensitive to monetary policy expectations.

Despite those concerns, Bitcoin initially posted a surprise rally after the release of the data, briefly approaching the $62,000 level before retreating toward $61,500, according to TradingView data.

Most major cryptocurrencies followed a similar pattern, including Ethereum (ETH), Solana (SOL), and XRP, all of which experienced sharp swings following the inflation report.

Despite the initial rebound, markets remain highly volatile, and the short-term direction for cryptocurrencies remains unclear as investors continue to await further signals regarding US monetary policy.

Oil prices were little changed on Wednesday as investors evaluated the implications of renewed tensions between the United States and Iran, balancing weaker Chinese demand against continued drawdowns in global inventories.

In trading, Brent crude futures slipped 25 cents, or 0.23%, to $91.24 per barrel by 10:08 GMT, while US West Texas Intermediate crude fell 14 cents, or 0.16%, to $88.06 per barrel.

Prices had risen earlier in the session following the latest exchange of strikes between Washington and Tehran before retreating back toward previous closing levels.

Tamas Varga, analyst at PVM, said ongoing declines in global inventories continue to support prices, but weaker Chinese crude imports are limiting further upside, alongside continued restrictions on shipping activity through the Strait of Hormuz.

Varga added that it remains difficult to reconcile the current relative calm in oil markets with an ongoing conflict in one of the world’s most important energy-producing regions.

Geopolitical tensions restore the risk premium

US forces launched strikes against Iranian targets after President Donald Trump vowed on Tuesday to retaliate for the downing of a US Apache attack helicopter.

Priyanka Sachdeva, Senior Market Analyst at Phillip Nova, said the latest attacks have refocused traders on war-related risks and the potential for supply disruptions.

She added that the recent military exchanges have reintroduced a geopolitical risk premium into oil markets despite continuing diplomatic efforts.

Meanwhile, Tehran warned that it would resume hostilities if Israel continues its operations against the Iran-backed Hezbollah militia in Lebanon.

Israel’s refusal to end its campaign against Hezbollah has further complicated Trump’s efforts to transform the fragile ceasefire in the broader conflict involving the United States, Israel, and Iran into a lasting settlement.

Iran continues to disrupt much of the shipping traffic through the Strait of Hormuz, which normally carries around one-fifth of the world’s crude oil and liquefied natural gas supplies, while Washington maintains a blockade on Iranian ports.

US Energy Secretary said on Tuesday that vessel traffic in the Gulf and oil exports through the Strait are increasing, despite stalled negotiations between Washington and Tehran aimed at ending the conflict that has lasted for more than three months.

In the United States, data from the American Petroleum Institute, according to market sources, showed that US crude inventories declined for an eighth consecutive week last week. Gasoline inventories also fell, providing additional support for oil prices.

The US dollar was little changed on Wednesday as investors monitored the latest developments between the United States and Iran while awaiting key US inflation data that could provide important clues about the future path of Federal Reserve interest rates.

US forces launched strikes against Iranian targets after President Donald Trump vowed on Tuesday to respond to the downing of a US Apache attack helicopter, marking a new escalation that threatens the fragile ceasefire between Washington and Tehran.

Meanwhile, Iran’s Revolutionary Guard announced missile and drone attacks targeting US military bases in Jordan, Kuwait, and Bahrain in retaliation for US strikes on Iranian positions near the Strait of Hormuz.

The US Dollar Index, which measures the greenback against a basket of major currencies including the euro and the yen, edged slightly lower to 99.88.

The euro rose about 0.1% to $1.1553, while the British pound gained a similar amount to $1.3386.

Dominic Bunning, Head of G10 FX Strategy at Nomura, said markets still view the chances of a negotiated settlement between the United States and Iran as greater than the likelihood of a full-scale escalation, despite the renewed tensions in the short term.

Markets focused on Fed policy amid geopolitical risks

Bunning added that investors remain focused on US economic data and interest-rate expectations, particularly following the appointment of Kevin Warsh as Federal Reserve Chair.

He noted that markets may eventually need to move beyond the current wait-and-see approach, adding that many investors still believe the dollar could extend its strength if US economic data continues to show resilience.

US inflation and the Japanese yen in focus

Investors are awaiting the release of the US Consumer Price Index for May later on Wednesday, a report widely viewed as critical in assessing the likelihood of additional Federal Reserve rate hikes this year following last week’s stronger-than-expected jobs report.

Sho Suzuki, market analyst at Matsui Securities, said stronger US inflation would reinforce expectations for higher interest rates and provide additional support for the dollar.

Japanese yen

In Asia, the Japanese yen remained a key focus as markets have almost fully priced in a Bank of Japan rate hike at its June 16 meeting. As a result, the decision alone may not be enough to reverse the yen’s weakness unless it is accompanied by a more hawkish message from Governor Kazuo Ueda.

Tony Sycamore, market analyst at IG, said investors need clearer signals from Ueda that the next rate increase could be brought forward from December to September, with the possibility of a third hike before year-end, for the yen to stage a meaningful recovery.

He added that Japan’s Ministry of Finance may be forced to intervene again in the currency market if the yen continues to weaken.

The Japanese currency was little changed at 160.36 per dollar, remaining close to the 160 level that investors widely regard as a potential trigger point for official intervention.

A Reuters survey of economists showed expectations that the Bank of Japan will raise its benchmark interest rate this month and again in the fourth quarter, lifting borrowing costs to 1.25% by the end of the year as policymakers grow increasingly concerned about inflation risks.

Data released on Wednesday also showed that Japan’s wholesale inflation accelerated to a three-year high of 6.3% in May compared with a year earlier, driven by broader price pressures linked to the conflict in the Middle East.