The specter of higher-than-2% inflation has loomed over the economy since the pandemic. But just as it seemed like the Fed had clawed its way out of unpopular rate hikes, a war with Iran has dragged it right back in.

Producer prices climbed 6.5% over the past year, the Bureau of Labor Statistics reported Thursday, the steepest annual jump since November 2022. A day earlier, consumer prices came in at 4.2%, the hottest since 2023. Both were driven by soaring energy costs as the Strait of Hormuz remains choked off.

Wholesale gasoline leaped more than 23% in a month, the BLS reported, which pulled up everything that runs on fuel: jet fuel, freight, trucking, diesel. Agricultural materials overall rose 14% in May alone.

The “core” producer price index, which excludes volatile food and energy costs, rose 0.4%, below the consensus view of 0.5%—indicating to some analysts that inflation isn’t broadening month-to-month.

Mohamed El-Erian noted the print came in “hotter than expected at the headline level but softer at the core level”—a sign, he wrote, that “the PPI spillover from energy into broader prices remains relatively muted for now.”

For the moment, much of that pass-through is being absorbed, El-Erian said, by “margin pressure”: companies eating higher costs instead of passing them on. But that buffer shows signs of thinning: trade margins shrank in May by the most in nearly a year.

Zooming out, though, this is not a May or an April problem; it is not even an American problem. Inflation is roaring back globally.

Beyond the headline number, the report’s core measure excluding food, energy, and trade rose 5.1% over the year, the most since October 2022. Deeper in the trade pipeline, prices for processed goods used by businesses climbed 13.3% annually, the steepest since August 2022, while raw, unprocessed inputs soared 22.2%, the fastest pace since September of that year.

To be sure, U.S. consumer inflation at 4.2% remains less than half its 9.1% peak of June 2022, and eurozone prices are rising at 3.2%, versus the 8%-plus the ECB was chasing the last time it raised rates. But the shape of this shock is beginning to form.

Europe raises interest rates

The European Central Bank raised interest rates for the first time since 2023 on Thursday, just minutes before the U.S. data landed. President Christine Lagarde made it clear that the move was a result of the war in Iran, calling it a “major energy shock” and warning that price stability was at risk: “We do have inflation that is too high for our citizens.”

Unlike American central bankers, the ECB made clear in its statement that this was not a temporary pass-through but a more durable shift—”robust across all scenarios”—and markets took the hint, pricing in further increases this year.

The same forces are surfacing in Asia. China—which has spent years fighting deflation—just posted its hottest wholesale inflation in nearly four years, driven in part by the war in Iran, which is lifting commodity costs. But China’s data revealed a second inflationary force: the global AI boom, bidding up the price of chips and equipment—and, as newly rich tech employees cash out vested stock, fueling a surge in luxury spending that further pressures demand.

The buildout is starting to do the same thing on the other side of the Pacific. As companies plan to spend trillions on data centers, memory chips and semiconductors—while chip supply is fixed in the short run—prices have risen fast. In the U.S. report, those components were up nearly 27% over the year, and analysts say the increases will soon reach phones, laptops and other personal technologies.

Households need not wait to feel the crunch. Real weekly earnings fell 0.7% over the past year, the worst drop since early 2023—meaning prices are outrunning wages, so the average worker can buy less than a year ago despite earning more on paper. The increases tend to hit consumers hardest where they can’t avoid them: gas, electricity, groceries, medical care.

UMass Amherst economist Isabella Weber wrote on X that the defining cruelty of an energy shock is “the inflation redistribution machine,” squeezing the majority through falling wages while soaring energy prices hand windfalls to oil and gas producers at the top. On top of Americans watching an upper echelon in tech grow fabulously wealthy from stock gains, it is perhaps not shocking that consumer sentiment has hit rock bottom.

The political fallout is compounding for the White House. Trump’s net approval has sunk to minus 25 points in The Economist’s tracker—the worst reading for any president since it began in 2009—and just 22% of Americans approve of his handling of the cost of living, per Reuters/Ipsos data.

Warsh inherits the Powell problem—and also Powell

The data leaves new Fed Chair Kevin Warsh with the same problem as his predecessor, Jerome Powell: are these inflationary shocks temporary pass-throughs, or are they seeping into the structure of prices? An oil shock isn’t something rate hikes can fix. But if inflation is a result of a broader economic overheating—money too easy, demand surging without the supply to match—then it is incumbent on the Fed to raise interest rates. And Warsh, whom Trump installed hoping for rate cuts, instead inherits an economy where cutting would look reckless.

Whether Warsh can lean is another matter. He arrives at a Federal Open Market Committee that is the most divided in a generation—four of twelve members dissented at the April meeting, the deepest split since 1992. The committee leans more hawkish than Warsh, and might look at the newcomer with suspicion.

The May report even contains the Weber thesis in miniature. Scan the product detail, and the redistribution machine is right there on the page: pork prices fell 10.1%, and residential electricity prices declined—cold comfort for households—while the single largest contributor on the services side was portfolio management fees, up 4.8% on the back of a booming stock market. In the same month that real wages posted their worst annual drop in three years, the service price that rose fastest was the cost of managing wealth.

Markets now price next week’s meeting as a near-certain hold, with a growing minority betting the next move is a hike. The easing everyone expected in 2026 has been erased. The president, for his part, is unbothered. “I love the inflation,” Trump told reporters Wednesday, predicting prices would “come down like a rock” once the war ends.