According to Reuters, US inflation exceeded 4% in May for the first time in three years due to higher energy prices following the Middle East conflict, while consumer spending remained resilient despite rising living costs.
the U.S. Federal Reserve’s preferred inflation gauge,
The personal consumption expenditures (PCE) price index, the U.S. Federal Reserve’s preferred inflation gauge, rose 4.1% in the 12 months through May, up from 3.8% in April, according to data released Thursday by the Commerce Department’s Bureau of Economic Analysis.
The reading matched economists’ expectations in a Reuters poll and put annual PCE inflation above 4% for the first time since April 2023. On a monthly basis, the PCE price index rose 0.4% in May, unchanged from April.
The rise in inflation follows a rise in global crude oil and gasoline prices due to the US-led conflict with Iran. Although oil prices have eased recently following a fragile ceasefire and preliminary peace agreement signed last week by US President Donald Trump and Iranian President Massoud Pezeshkian, economists expect inflation pressures to persist for some time.
Consumers were already struggling with higher prices as a result of Trump’s sweeping import tariffs before the conflict, making the cost of living a major political issue ahead of the November midterm elections. Excluding volatile food and energy prices, the core price index for personal consumption expenditures rose 3.4% year-on-year in May after rising 3.3% in April.
On a monthly basis, core PCE inflation rose 0.3%, unchanged from the previous month. The Federal Reserve targets 2% inflation and closely tracks the PCE index when setting monetary policy.
Last week, the Fed left its benchmark interest rate unchanged in the 3.50%-3.75% range, although updated projections showed policymakers expect borrowing costs to rise later this year amid persistent inflation concerns.
Financial markets are currently estimating a possible rate hike as early as September, with another hike likely after that. Despite increased inflation, US consumers continued to spend, supported by larger tax refunds, rising stock markets and lower household savings.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.7% in May after rising 0.4% in April.
According to Reuters, while part of the increase reflects higher prices, consumption appears to be accelerating in the second quarter after slowing in the January-March period. According to current estimates, US GDP growth in the second quarter will be 3% on an annual basis.
However, economists expect household spending to moderate later this year as inflation continues to outpace wage growth, tax refund benefits diminish and household savings decline.
