The U.S. inflation gauge most closely watched by the Federal Reserve climbed 4.1% in the 12 months through May, the Bureau of Economic Analysis said Thursday — the first reading above 4% in three years and the highest since April 2023.
On a monthly basis, the PCE price index advanced 0.4%, the same pace as April. Stripping out food and energy, the core measure came in at 3.4% above year-ago levels and 0.3% higher than the prior month.
Spending held up despite the inflationary backdrop. The 0.7% monthly jump in personal consumption expenditures outpaced both the forecast and the inflation rate, with services accounting for $94.3 billion of the increase and goods contributing $61.8 billion. Personal income matched that 0.7% gain, and the saving rate stood at 3%.
The May inflation reading was in line with the forecast of economists polled by Reuters. The annual PCE rate had come in at 3.8% in April.
Much of the pickup in inflation traces back to the U.S.-led war against Iran, which sent oil and gasoline prices sharply higher. A fragile ceasefire has since brought fuel prices down from their peaks, but economists do not expect inflation to cool quickly. Adding to the pressure, import tariffs had already been pushing up costs for consumers before hostilities broke out.
At last week's meeting, Fed policymakers held the benchmark rate steady in the 3.50%-3.75% range, though updated projections pointed toward at least one increase before year-end. Traders in interest-rate markets have September circled as the most likely date for a first hike.
Price stability was a central theme of last week's gathering, where new Fed Chair Kevin Warsh made clear it was a top priority. The FOMC's post-meeting statement broke with recent language by committing unequivocally to "deliver price stability," and the committee's rate projections dropped a previously penciled-in cut.
Tax refunds and a rising stock market have helped households absorb higher costs and keep spending going even as inflation has outrun wage growth. Those tailwinds are fading, though, and with saving rates already low, many forecasters anticipate a meaningful slowdown in household outlays once the third quarter arrives.