Fed inflation gauge rises to three-year high

The Federal Reserve’s preferred inflation gauge accelerated in May to its fastest annual pace in more than three years, as higher oil and gasoline prices pushed costs up even while U.S. consumers kept spending.

The Personal Consumption Expenditures index rose at a 4.1% annual rate in May, up from 3.8% in April and the highest reading since April 2023. The result matched economists’ forecasts cited by FactSet. Core PCE, which excludes volatile food and energy costs, rose 3.4%, slightly above the 3.3% economists had expected and the highest level since October 2023, NBC News reported.

On a monthly basis, PCE increased 0.4%, matching April’s pace, while core prices rose 0.3%, up from 0.2% in April.

The latest report underscores the Fed’s challenge as it tries to bring inflation back to its 2% target. Earlier this month, Federal Reserve Chairman Kevin Warsh said the central bank is committed to lowering inflation to that level. The Fed held its benchmark interest rate steady at its June 17 meeting but left open the possibility of a rate increase later this year.

Oil prices were a major driver of the May increase. The Iran war pushed up oil and gasoline prices, leaving U.S. drivers paying the highest fuel costs in three years, CBS News reported. Analysts said May could represent the peak of the latest inflation surge because crude prices eased in June amid hopes that the Strait of Hormuz, a key Persian Gulf waterway that handles 20% of global oil flows, would remain open.

“It’s our expectation that inflation will start going lower now that the Strait of Hormuz has reopened and oil prices are coming down, so that may alleviate some of the pressure on the Fed, but next month’s data needs to be lower than what we are seeing today if that is going to be the case,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in an email.

Brent crude, the international benchmark, fell 34 cents, or 0.5%, to $73.40 a barrel on Thursday, down more than 35% from its recent peak of about $114, according to FactSet. “We estimate headline inflation has peaked and will trend lower in the second half of the year, assuming the Strait of Hormuz remains open,” Nationwide chief economist Kathy Bostjancic said.

Treasury Secretary Scott Bessent also said Wednesday that inflation is moving in the right direction. “Now that we are, I believe, on the other side of this conflict, gas prices will come back down, inflation will come back to target,” he said after an appearance at the Economic Club of New York.

Despite higher prices, consumers continued to spend. Adjusted for inflation, spending rose 0.3% in May after showing no growth in April. Inflation-adjusted incomes also rose 0.3%, rebounding from a 0.5% decline in April.

Bank of America CEO Brian Moynihan told NBC News the bank’s credit and debit card data showed consumer spending rose in May. Consumers “are still spending on vacations and things like that, which is good for America. They still go out to eat, which is also good. Those are job-creating activities,” he said.

Other inflation pressures remain. CBS News reported that the artificial intelligence buildout has made computer components more expensive, and Apple announced last week it would raise prices on computers and iPads because of higher costs. Service prices also rose sharply, driven by restaurant meals, hotel rooms, auto repairs and health care.

A separate government report Thursday showed the economy grew at a 2.1% annual rate in the first quarter, revised up from 1.6%. Unemployment benefit claims fell last week, a sign layoffs remain low.

Economists said the combination of solid growth and inflation above target could keep the Fed from cutting rates soon. “Today’s data is a reminder that inflation remains well above target and growth remains solid,” Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said in an email. “This will keep the Fed on hold for quite some time, until conditions allow for a cut.”