The U.S. economy added a robust 172,000 jobs in May, a sign that the labor market remained resilient despite a growing energy and inflation crisis triggered by the ongoing war with Iran.
According to the Bureau of Labor Statistics, the unemployment rate remained steady at 4.3%.
While hiring is solid, there’s growing concern about wage growth lagging the rate of price growth. Average hourly earnings rose 3.4% from a year ago. In April, inflation sharply jumped to a 3.8%, its highest level in three years, due to the surging price of gasoline and the resulting economic ripple effect. The government will release the May inflation report next week.
Since the United States and Israel launched the war with Iran on Feb. 28, the average price of retail gasoline has soared more than 40% as the price of U.S. crude oil increased more than 35%.
Given the relative strength of the jobs market, it’s looking more likely that the Federal Reserve will raise interest rates this year in a bid to put a lid on inflation.
In the immediate aftermath of the release Friday, U.S. Treasury yields shot up and stock futures tumbled. Fed rate futures also quickly indicated that traders are now projecting a more than 60% chance of a rate hike in October and a more than 98% chance by December’s Fed meeting.
The Fed will make its next interest rate decision June 17, during Kevin Warsh’s first meeting as chair. President Donald Trump, who appointed Warsh, has been pushing for lower rates.
“If Chair Warsh pushes for cuts at his first meeting, he will be pushing against the evidence,” said Seema Shah, chief global strategist at Principal Asset Management.
Once again, some of the largest contributors to job growth in May were the education and healthcare sectors. They have largely driven labor market gains over the last year.
There was also a surprise gain of jobs in the leisure and hospitality industry. May’s increase of 70,000 jobs was “well above the average monthly gain of 14,000 over the prior 12 months,” BLS said.
Local government also saw job gains.
Some of the weakest sectors in May included financial services, which shed 22,000 jobs, and the transportation/warehousing industry. That sector is “down by 92,000 [jobs] since reaching a peak in February 2025,” the agency said.
There was good news in revised numbers for previous months, too. BLS also said that employment in March and April was revised up by 93,000. Employment in March was revised up 29,000 and April was revised up by 64,000 roles.
Fed officials have signaled their wariness about the trajectory of the economy in recent weeks.
“If recent data trends continue, it may soon be appropriate for policy to act to address the growing risks of persistently elevated inflation,” Beth Hammack, president of the Federal Reserve Bank of Cleveland, said Tuesday. Hammack is a voter on the Fed’s interest rate-setting committee. She added that “monetary policy may not be sufficiently restrictive to bring inflation down to 2%.”
But more troubling for economists is the 55% rise in the price of diesel fuel, which is used in shipping, farming, transportation and construction. It can quickly raise costs for consumers as the higher price is passed down across a number of industries.
Wholesale inflation — what businesses pay other businesses for goods and services — surged to 6% in April, according to BLS data released May 13. That was sharply higher than the 4.3% in March.
“If we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments, at greater cost,” Hammack added.
Fed governor Lisa Cook, likewise, said last week in a speech: “I want to be clear about my risk assessment: The risks remain tilted toward higher inflation.”
Cook also said trillions of dollars of artificial intelligence investments could cause another price shock. Over the course of the last year, the prices of data center equipment, computer memory and chips have soared.
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