US inflation accelerated further in May, with a key measure of price pressures climbing above 4% for the first time in more than three years as higher energy prices stemming from the Middle East conflict filtered through the economy.
The Commerce Department’s Bureau of Economic Analysis said on Thursday that the personal consumption expenditures (PCE) price index rose 4.1% in the 12 months through May, up from 3.8% in April.
It marked the largest annual increase and the first reading above 4% since April 2023.
The figure matched economists’ expectations in a Reuters poll.
On a monthly basis, the PCE price index rose 0.4% in May, matching April’s increase.
The PCE index is the Federal Reserve’s preferred inflation gauge and is closely monitored by policymakers because it provides a broad view of consumer spending patterns.
Energy prices drive inflation higher
The latest inflation increase was driven largely by higher energy prices.
The US-led conflict involving Iran had pushed oil prices sharply higher earlier this year, resulting in increased gasoline prices and higher transportation costs across the economy.
Although crude oil and gasoline prices have retreated in recent weeks following a fragile ceasefire agreement and a preliminary peace deal signed last week by President Donald Trump and Iranian President Masoud Pezeshkian, economists expect inflationary pressures linked to energy costs to persist for some time.
Before the conflict, American consumers were already contending with higher prices resulting from Trump’s broad import tariffs, which had raised the cost of several consumer goods.
The persistence of elevated prices has become a growing political challenge for Trump and his Republican Party as they seek to retain control of Congress in November’s midterm elections.
Trump won the 2024 presidential election in part on promises to bring inflation down.
Underlying inflation remains elevated
Underlying price pressures also remained firm.
Excluding volatile food and energy components, the core PCE price index rose 3.4% year-on-year in May after increasing 3.3% in April.
Core inflation increased 0.3% on a monthly basis, matching April’s pace.
The annual core inflation rate remains significantly above the Federal Reserve’s 2% target.
While consumer inflation data released earlier this month had suggested some moderation in underlying price pressures, components of wholesale inflation reports pointed to firmer PCE inflation.
Because economists can use data from consumer and producer price reports to estimate PCE inflation with considerable accuracy, Thursday’s reading was largely in line with expectations.
Spending remains resilient despite higher prices
Despite elevated inflation, consumer spending continued to hold up.
Consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.7% in May after rising 0.4% in April.
Some of the increase reflected higher prices, but economists said spending has also been supported by larger tax refunds this year, gains in stock markets and households drawing on savings.
The resilience in spending has bolstered expectations for stronger economic growth during the current quarter.
Current estimates for second-quarter gross domestic product growth are running as high as an annualized rate of 3%.
However, economists cautioned that inflation is rising faster than wages, tax refunds have largely been exhausted and savings are dwindling.
Those factors are expected to weigh on consumer demand later this year.
Markets see higher odds of Fed rate hikes
The inflation report reinforced expectations that the Federal Reserve could resume raising interest rates this year.
The central bank last week left its benchmark interest rate unchanged at a range of 3.50% to 3.75%.
However, policymakers updated their quarterly projections and indicated that they anticipated additional rate increases amid persistent inflation concerns.
Financial markets are increasingly betting that the next rate increase could come as soon as September, with another move potentially following before year-end.
Both headline and core PCE inflation have remained above the Federal Reserve’s 2% target since early 2021, underscoring the challenge facing policymakers as they attempt to bring inflation under control without significantly weakening economic growth.
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