US producer prices increased more than expected in May, posting their largest annual gain in three and a half years as energy costs climbed due to the conflict in the Middle East.

The Labor Department's Bureau of Labor Statistics said on Thursday that the Producer Price Index for final demand rose 1.1% in May, matching a downwardly revised increase of 1.1% in April.

Economists polled by Reuters had expected the index to rise just 0.7%, following a previously reported 1.4% jump in April.

On an annual basis, producer prices increased 6.5% in the twelve months through May, marking the largest gain since November 2022.

Most of the increase was driven by higher goods prices, particularly energy products. Goods prices rose 2.8% and accounted for roughly 80% of the overall increase in the index, while services prices advanced 0.3%.

The US-Israeli war against Iran has driven up energy product prices, including gasoline and diesel. Global supply chains have also come under pressure due to restrictions on shipping through the Strait of Hormuz, leading to shortages across a broad range of products, including fertilizers, aluminum, and consumer goods.

On Wednesday, the US government reported that consumer inflation climbed above 4% in May for the first time in three years.

The Federal Reserve monitors the Personal Consumption Expenditures (PCE) Price Index as its preferred gauge for achieving its 2% inflation target.

The acceleration in inflation, combined with a resilient labor market, has led financial markets to increase pricing for the possibility of a Federal Reserve rate hike. However, many economists still believe the likelihood of additional monetary tightening remains limited, arguing that the oil-price shock is still largely confined to the transportation sector.

The US central bank is widely expected to keep its benchmark interest rate within the 3.50%-3.75% range at next week's meeting, although policymakers are expected to abandon their previous bias toward future rate cuts.

Following the release of consumer inflation data, economists estimated that the PCE Price Index rose 0.4% in May, matching the increase recorded in April.

The annual PCE inflation rate is also expected to accelerate to 4.0% in May, the fastest pace since May 2023, compared with 3.8% in April.

The European Central Bank announced its interest rate decision on Thursday at the conclusion of its June 10-11 policy meeting, raising rates by 25 basis points to 2.40%.

The move marks the first interest rate increase in the eurozone since July 2023 and was broadly in line with market expectations.

Bitcoin has entered a fresh downward move below the $62,500 zone, with negative technical signals suggesting the price could face further losses if it falls beneath the $61,200 level.

Rate hike concerns

Although the US Consumer Price Index rose 4.2% in the 12 months through May, marking the highest annual inflation rate since April 2023, economists still see limited prospects for further monetary tightening.

Core inflation, which excludes food and energy prices, increased 0.2% during the month after rising 0.4% in April, boosting hopes that inflationary pressures stemming from the energy price shock can be contained.

James Knightley, chief international economist at ING, said labor costs remain the biggest burden on US businesses, and with wage growth continuing to slow, this could help ease pressure on core inflation.

"All of this should help keep inflation expectations under control. Therefore, while we no longer expect the Fed to cut interest rates this year due to stronger economic momentum, we also do not expect a rate hike," he said.

Markets are currently pricing in a full 25-basis-point rate increase in December, a significant shift from earlier expectations that had pointed to two rate cuts this year before the outbreak of the Iran conflict at the end of February.

Bitcoin retreats toward support levels

Bitcoin failed to hold above the $63,500 support area, remaining within a bearish trading range and extending its losses below the $63,200 level before also breaking beneath $62,500.

The cryptocurrency fell below $61,200 and reached a low of $60,746, while technical indicators continue to reflect persistent selling pressure.

Bitcoin posted a limited rebound above the 23.6% Fibonacci retracement level of the decline from the $64,613 high to the $60,746 low.

The cryptocurrency is currently trading below the $62,500 level and beneath the 100-hour simple moving average. A bearish trend line has also formed, with resistance emerging near $62,400 on the hourly BTC/USD chart.

Oil prices retreated on Thursday after posting gains earlier in the session, driven by the escalating confrontation between the United States and Iran, as traders began assessing the actual impact of the tensions on global supply.

Tehran announced the closure of the Strait of Hormuz after the United States launched additional strikes against Iranian targets, while President Donald Trump pledged further attacks if a peace agreement is not reached.

Despite the escalation, three Iranian sources told Reuters that efforts to reach a preliminary agreement between the two countries have intensified, even as both sides continue exchanging strikes. Discussions are reportedly underway regarding a mechanism for releasing frozen Iranian funds.

Weak Chinese fuel demand also helped limit the oil rally triggered by the Iran crisis, as softer gasoline and diesel consumption, along with lower crude imports, eased pressure on global prices.

Brent crude futures fell 53 cents, or 0.6%, to $92.57 a barrel by 09:41 GMT, while US West Texas Intermediate crude declined 36 cents, or 0.4%, to $89.67 a barrel. Both benchmarks had risen by more than $2 earlier in the session.

Iran's Joint Military Command announced the closure of the Strait of Hormuz to oil tankers and commercial vessels, warning that any ship attempting to transit the waterway would come under fire.

"The latest escalation adds further uncertainty to already fragile ceasefire negotiations and increases the risk of prolonged supply disruptions that have constrained global exports of crude oil, refined fuels, and liquefied natural gas since the conflict began," said Soojin Kim, analyst at MUFG Bank.

Commercial vessels continue transiting

Despite the tensions, signs emerged that supply conditions may not be as severe as many fear.

The US military said on X on Wednesday that commercial vessels continue to transit to and from the Strait of Hormuz, adding that no US warships had come under attack in the waterway. The statement followed Iranian media reports claiming that US vessels near the strait had been targeted by missiles and drones.

Data from LSEG and Kpler also showed that three additional LNG carriers successfully departed the Strait of Hormuz bound for Asia with their tracking systems switched off, although the exact timing of their passage remains unclear.

Meanwhile, India reported an incident involving a vessel near the Omani port of Shinas, marking the third such event this week. However, officials at Indian refining companies told Reuters they had secured sufficient crude supplies to meet demand through at least August.

Abu Dhabi National Oil Company (ADNOC) and several other sellers also managed to export part of their crude shipments and offered additional cargoes for sale to buyers in Asia.

In the United States, data from the Energy Information Administration showed crude oil inventories fell by 7.2 million barrels to 426.5 million barrels in the week ended June 5, compared with analysts' expectations in a Reuters poll for a decline of around 4 million barrels.

In another sign of tightening supplies, a Reuters survey showed OPEC production in May fell to its lowest level in more than two decades after US maritime restrictions curtailed Iranian exports, while the effective closure of the Strait of Hormuz reduced shipments from several other Gulf producers.