The Federal Reserve's preferred inflation gauge rose to a new three-year high in May, driven by peak gas prices, signaling that rising costs could create political difficulties for Donald Trump and his party as midterm elections approach.
Consumer prices surge 4.1% annually
Consumer prices increased 4.1% in May from a year earlier, the US Commerce Department reported Thursday, marking the largest annual jump since April 2023. On a monthly basis, inflation was 0.4% in May, matching April's increase and down from 0.7% in March.
Gas and semiconductors drive inflation
The rise was largely due to more expensive gas, along with higher prices for semiconductors and other computer equipment in high demand for AI development. These price increases have led the Federal Reserve to keep its key interest rate unchanged this year, a shift from January when two cuts were anticipated. Some economists now predict the central bank may raise rates this year.
New Fed Chair Kevin Warsh recently emphasized the central bank's commitment to bringing inflation back to its 2% target but did not indicate specific actions. Expectations of rate hikes have unsettled US markets this week, particularly impacting fast-growing sectors like technology.
Gas prices fall after peace deal
Oil and gas prices have dropped substantially since Trump agreed to a peace deal with Iran, but the conflict had pushed gas prices to nearly $4.50 per gallon on average nationwide last month. As of Thursday, prices have fallen to $3.92, according to AAA, still more than 20% above last year's levels as the driving season begins.
Consumer spending and incomes rise
Thursday's report also showed solid consumer spending growth. Adjusted for inflation, spending rose 0.3% from April to May. Incomes, also adjusted for inflation, increased for the first time in four months, rising 0.3%, which could support consumer spending in the coming months.
Inflation has exceeded the Fed's 2% target for over five years, leaving many Americans pessimistic about the future. Mark Vitner, chief economist at Piedmont Crescent Capital, noted that inflation had not topped 2.5% for nearly a decade before the pandemic, making the recent spikes even harder for households to accept.
PCE index details
Thursday's report covers the personal consumption expenditures (PCE) price index, a measure less known than the consumer price index, which earlier this month showed a similarly large increase. The Fed prefers the PCE index because it places less weight on housing and reflects changes in shopping behavior when prices rise, such as consumers buying cheaper off-brand items.
