US consumer prices climbed 0.4% in May, driven by a sharp rise in energy costs.
Filling the car, both with fuel and groceries, is costing more
The rise, in line with expectations, increases speculation that the US Federal Reserve will raise interest rates when it meets later this month.
The Labor Department said core inflation, which does not include food or energy costs, increased by 0.3% for a third consecutive month.
Fears that rising prices could trigger higher interest rates have put stock markets on edge in recent weeks.
The announcement sent the FTSE 100, France's Cac index and the German Dax sharply lower.
The rising cost of renting home and apartments had caused around half the rise on the core index, the Labor department said.
This brought the brought the core annual rate up to 2.4% - the highest since early 2005 - and well above the level the US central bank, the Federal Reserve, believes is non-inflationary.
Three consecutive months of 0.3% core inflation rises was "highly unusual," said Anthony Karydakis, an economist at JP Morgan Asset Management.
"You have a problem in the area of rents because of the weakness in the housing market," he said.
"Fewer people are buying homes, they become renters and put upward pressures on rents."
Peter Dunay, investment strategist with Leeb Index Group said that 0.25% interest rate hike at the end of June now looked like "a done deal".
Stock markets around the world have been nervous in recent weeks that worldwide interest rates are likely to rise further, which would weaken the prospect for corporate profits.
The European Central Bank has recently raised rates, and many analysts are now expecting the Bank of England to follow suit by the end of the year.