The Federal Reserve’s primary inflation measure surged to its highest reading in nearly three years, adding pressure on policymakers already signaling a tougher stance on rates.
The core personal consumption expenditures price index rose at a 3.4% annual rate in May, after climbing 0.3% for the month, both figures landing in line with the Dow Jones consensus estimate.
That annual core reading marked the highest level since October 2023, reinforcing growing concerns that inflation remains stubbornly elevated across the broader economy.
The all-items PCE index showed inflation running at a seasonally adjusted 4.1% annual rate, the highest since April 2023, according to a Commerce Department report released Thursday.
On a monthly basis, the headline PCE accelerated 0.4%, coming in 0.1 percentage point below the Dow Jones consensus estimate, while the annual reading matched expectations.
Energy remained the largest driver of price gains, with related goods and services prices jumping 4% for the month, as costs tied to the Iran war continued seeping into other parts of the economy.
Housing costs rose 0.3% for the month, while financial services and insurance posted a sharper increase of 1.2%, contributing to the broadening of price pressures beyond the energy sector.
“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,” Long added.
Despite the elevated inflation environment, consumer spending came in stronger than expected, with personal consumption expenditures rising 0.7% for the month, 0.1 percentage point above the forecast.
Personal income also climbed 0.7% for the month, significantly above the 0.4% forecast, while the personal saving rate rose to 3%, suggesting households are still managing to set money aside.
The report arrived just over a week after Fed Chair Warsh and the Federal Open Market Committee delivered what markets widely viewed as a hawkish policy signal, with the FOMC stating it would “deliver price stability” after missing its 2% inflation target for five years running.
Officials also removed a previously indicated rate cut from projections this year and signaled the likelihood of a rate hike, a notable shift from earlier guidance that had leaned toward further easing.
Multiple Fed officials had dissented at the April meeting because the statement included forward guidance tilting toward further cuts, and that language was stripped from last week’s statement entirely.
Stock market futures held in positive territory following Thursday’s data release, while Treasury yields slipped, and traders continued to price in a rate hike in September, though odds dipped slightly.
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 above the forecast of 1.7%, per the Commerce Department’s final reading.
The upward revision to GDP largely reflected a downward adjustment to imports, which subtract from the overall growth calculation, painting a somewhat stronger picture of domestic demand.
Initial jobless claims fell to 215,000 for the week ended June 20, down 12,000 from the prior reading and better than the estimate of 223,000, adding to signs of underlying economic resilience.
