PostgreSQL: changing password for a user is not working

Question

• I installed PostgreSQL on EC2 machine and now I want to change the password of user postgres
• I do

$ sudo -u postgres psql
psql (9.1.5)
Type "help" for help.

postgres=# ALTER USER postgres WITH PASSWORD 'newpasswd';
ALTER ROLE

• Then I exit the shell and try to login with new password

$ psql -U postgres -W
Password for user postgres: 
psql: FATAL:  Peer authentication failed for user "postgres"

My PostgreSQL version is

$ psql --version
psql (PostgreSQL) 9.1.5
contains support for command-line editing

What is that I am doing wrong?

Thank you

UPDATE I made changes in pg_hba.conf and this is how it looks now

# Database administrative login by Unix domain socket
local   all             postgres                                peer

# TYPE  DATABASE        USER            ADDRESS                 METHOD

# "local" is for Unix domain socket connections only
#local   all             all                                     peer
local   all             all                                     md5
# IPv4 local connections:
host    all             all             127.0.0.1/32            md5
# IPv6 local connections:
host    all             all             ::1/128                 md5

Then I restarted the postgres

$ sudo /etc/init.d/postgresql restart
 * Restarting PostgreSQL 9.1 database server                                                                                                                                               [ OK ] 

I tried logging in again, but failed

$ psql -U postgres -W
Password for user postgres: 
psql: FATAL:  Peer authentication failed for user "postgres"