The Federal Reserve’s preferred inflation gauge climbed to its highest point in nearly three years, adding pressure on policymakers to act decisively on interest rates.
The core personal consumption expenditures price index rose at a 3.4% annual rate in May, after increasing 0.3% for the month, matching the Dow Jones consensus estimate exactly.
The annual core reading was the highest since October 2023, marking a notable acceleration that will weigh heavily on the Fed’s decision-making in the months ahead.
The all-items PCE index showed inflation running at a seasonally adjusted 4.1% annual rate, the highest level recorded since April 2023, according to a Commerce Department report.
Energy prices again drove the largest share of gains, with related goods and services prices surging 4% for the month, as the Iran war continued to push costs higher across the economy.
Housing costs rose 0.3% during the period, while financial services and insurance jumped 1.2%, signalling that price pressures are broadening beyond energy into other sectors.
“Inflation is at a 3-year high due to the war in Iran and it’s painful for middle-class and moderate-income Americans,” said Heather Long, chief economist at Navy Federal Credit Union.
“People are spending more on gas, along with healthcare and utilities. New Fed Chair Kevin Warsh has made his commitment clear to bring inflation down. The key will be how much relief happens by September.”
Despite elevated inflation, consumer spending proved more resilient than anticipated, with personal consumption expenditures rising 0.7% for the month, beating the forecast by 0.1 percentage point.
Personal income also climbed 0.7% for the period, well above the 0.4% forecast, while the personal saving rate edged up to 3%, suggesting households are not yet buckling under inflationary strain.
Stock market futures held in positive territory following the release, while Treasury yields slipped and traders continued to price in a Fed rate hike in September, though odds were trimmed slightly.
The Federal Open Market Committee recently adopted language in its post-meeting statement unequivocally stating it would “deliver price stability” after missing its 2% inflation target for five consecutive years.
Officials also removed a previously indicated rate cut from their projections and signalled a likelihood of a hike, with multiple Fed members having dissented at the April meeting over guidance language that tilted toward further cuts.
Concerns are growing among policymakers that price increases driven initially by energy are becoming more widespread and are being further fuelled by the impact of tariffs on the broader economy.
Separately, gross domestic product rose at a seasonally adjusted annualized pace of 2.1% in the first quarter, up from the prior reading of 1.6% and ahead of the forecast of 1.7%.
The Commerce Department attributed the upward revision largely to a downward adjustment to imports, which are subtracted from the GDP calculation, reflecting a slightly stronger underlying economic picture.
Initial jobless claims also fell to 215,000 for the week ended June 20, down 12,000 from the prior reading and comfortably below the estimate of 223,000, pointing to continued labour market resilience.