Summary US wholesale inflation rose 1.1% in May, driven largely by war-related oil price spikes from Iran.

The annual Producer Price Index reached 6.5%, the highest rate seen in more than three years.

Higher business costs could eventually filter down to consumers already facing elevated gas prices nationwide.

US consumers are facing the fastest price inflation they’ve seen in three years.

It likely hasn’t yet peaked.

New data Thursday showed that input costs for American businesses are still rising quite rapidly as the Iran war’s oil shock continues to ripple through the economy.

The Producer Price Index, a closely watched gauge of wholesale inflation, rose 1.1% in May, lifting the annual rate to 6.5%, its highest since November 2022, according to Bureau of Labor Statistics data released Thursday.

While wholesale inflation doesn’t exactly translate to what consumers end up paying, Thursday’s PPI is sending warning signals that even more price hikes are coming down the pike.

Wholesale inflation is running at the second-fastest pace on record: The 1.1% increase in monthly inflation, which matched the rate of increase seen in April, following revisions, is the fastest since March 2022. The annual rate is the highest since November 2022.

Thursday’s data came in hotter than expected. Economists were thinking that the war-driven price spike would still pack a punch, but one with a little less bite than in April, which originally showed a 1.4% monthly price hike.

Economists were expecting PPI to rise 0.6% from April and the annual rate to reach 6.4%, FactSet estimates show.

“That pressure has to go somewhere – flowing downstream to the retailers that purchased those goods, the transportation companies that move those goods to market, and eventually the consumers,” Kurt Rankin, senior economist at the PNC Financial Services Group, told CNN. “That sustained pressure upstream means that this inflationary story has not resolved.”

Rate hike, layoff concerns on the rise

PPI, which measures the average change in prices received by US-based producers, serves as a potential bellwether for what consumers could experience in the months to come, though the higher prices businesses pay each other aren’t always fully passed through the supply chain.

PPI also is closely watched because several of its categories feed in to the Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation gauge.

The Fed — with its new leader, Chair Kevin Warsh — is expected to keep its benchmark interest rate steady at next week’s policymaking meeting; however, the acceleration in inflation and a trio of stronger-than-expected jobs reports have the chatter growing for an eventual rate hike.

“The talk of higher rates is certainly warranted, but whether that comes to fruition, though, depends on how these price pressures flow through,” Rankin said, noting PNC does not have any rate hikes in its forecast. “We saw after the tariff situation and in the early months of this conflict that producers are aware that consumers are not just blindly accepting higher prices.”

That dynamic could spell another concern, though.

“If they don’t push their own costs through to consumers, and if the consumer inflation does not rise as dramatically as it might, those producers then have to face how to offset these costs, which puts that very job creation at risk,” he said.

And it’s likely not going to until traffic flows more freely in the Strait of Hormuz, a critical shipping passageway that has been essentially choked off because of the war.

“Oil prices have already come back down from over $100 to around $90, but the renewed military conflict in the past day or so puts in doubt the sustainability of that decline,” Rankin said. “The opening of the Strait of Hormuz doesn’t immediately solve the problem … it’ll take time to clear that backed-up inventory, take time to rebuild the infrastructure.”

One price shock after another

Consumers are already feeling the pinch from the higher cost of gas: In May, elevated prices at the pump helped push overall inflation to a three-year high of 4.2%, according to the latest Consumer Price Index, released Wednesday.

Wholesale inflation can eventually impact consumers’ wallets; however, it happens on an indirect and uncertain path, noted Elizabeth Renter, senior economist at NerdWallet.

“The latest figures portend some inflationary pressures will continue to weigh on households in the months ahead,” she wrote in a note Thursday.

Excluding food and energy prices, a core measurement of PPI rose 0.4% from April, holding at 4.9% annually.

When also stripping out the price changes for “trade services” – a volatile category that measures profit margins for wholesalers and retailers – in addition to energy and food, that index rose 0.8% in May (a four-year high) and 5.1% annually, the largest rise since October 2022.

The higher fuel prices appear to be starting to spill over into higher goods prices and may be starting to lift some services prices, said Oliver Allen, senior US economist at Pantheon Macroeconomics.

“It’s sort of a given that gas prices have obviously risen a long way and that’s pained consumers, and it’s gotten to a point where real wages are falling slightly,” Allen said. “But what we’re starting to see clear evidence now is that the upward creep in goods prices that consumers have noticed because of the tariffs over the past year, that’s not going to let up.”

Fears of stubborn inflation are also weighing on the housing market.

The average 30-year fixed mortgage rate is hovering near its highest level of the year, driving up borrowing costs for home buyers. Mortgage rates generally follow the 10-year Treasury yield, which has climbed as investors bet the Fed may need to keep interest rates elevated for longer to tame inflation.