U.S. inflation rose further in May, climbing above 4.0 percent for the first time in three years as energy prices were pushed higher by conflict in the Middle East, increasing expectations that the Federal Reserve could move closer to raising interest rates later this year. According to the Commerce Department’s Bureau of Economic Analysis, the personal consumption expenditures (PCE) price index increased 4.1 percent in the 12 months through May, the highest reading since April 2023, following a revised 3.8 percent gain in April.
The monthly PCE index rose 0.4 percent in May, matching the previous month’s increase and slightly above economists’ expectations of 4.1 percent. Core PCE inflation, which excludes food and energy, increased 3.4 percent year-on-year after rising 3.3 percent in April, while monthly core inflation advanced 0.3 percent.
Energy pressure
The rise in inflation was partly driven by higher oil and gasoline prices following the U.S.-led war against Iran, although prices have eased in recent weeks amid a fragile ceasefire and a preliminary peace deal aimed at reopening shipping routes. Despite this moderation, economists expect inflation to remain elevated due to earlier energy shocks and persistent cost pressures. The Federal Reserve, which targets 2 percent inflation based on PCE measures, recently held interest rates in the 3.50–3.75 percent range but signaled potential tightening ahead as policymakers revised projections to reflect renewed inflation concerns. Financial markets are now pricing in a possible rate hike as early as September, with additional increases expected thereafter.
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Consumer spending resilient
Despite rising inflation, U.S. consumer spending remains resilient, increasing 0.7 percent in May after a 0.4 percent rise in April, supported by tax refunds, a stock market rally, and households drawing down savings. However, economists warn that spending momentum may slow later in the year as wage growth lags behind inflation and household savings decline. Gross domestic product forecasts for the second quarter currently point to annualized growth of around 3.0 percent, although weaker consumption is expected to weigh on activity in the third quarter.
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