Key Inflation Gauge Jumps to 3-Year High

The Federal Reserve's preferred inflation gauge rose to a new three-year high in May as gas prices peaked, a sign rising costs could pose political problems for President Trump and his political party as midterm elections near. Consumer prices rose 4.1% in May from a year earlier, the Commerce Department said Thursday, the largest annual increase since April 2023. On a monthly basis, inflation was 0.4% last month, matching April's increase and down from 0.7% in March.

• Thursday's report covers the personal consumption expenditures price index, a lesser-known measure compared to the consumer price index, which was released earlier this month and showed a similarly large increase. The Fed prefers the PCE index because it puts less weight on housing and also reflects changes in how Americans shop when prices rise, such as when consumers buy cheaper off-brand items.
• The increase was largely driven by more expensive gas, as well as pricier semiconductors and other computer equipment that are in high demand for the AI buildout, the AP reports. Rising prices have caused the inflation-fighters at the Federal Reserve to keep their key rate unchanged this year, a reversal from January when they had penciled in two cuts. Some economists forecast the central bank could lift rates this year instead.

• Oil and gas prices have fallen substantially since Trump agreed to a peace deal with Iran earlier this month, but the conflict lifted gas prices to nearly $4.50 a gallon on average nationwide in May. They have since fallen back to $3.92 as of Thursday, according to AAA, but that's more than 20% above prices at this time last year as the driving season gets underway.
• Declining gas prices will likely pull down headline inflation next month, yet measures of underlying inflation remain stubbornly elevated and will be a concern for the Fed. Excluding the volatile energy and food categories, core prices rose 3.4% in May compared with a year earlier, up from 3.3% in April and the largest increase since October 2023. On a monthly basis, they rose 0.3% from April to May, the same as the previous month.
• Higher gas prices aren't the only thing worsening inflation. The AI buildout has made computer components more expensive, and Apple announced last week that it would raise prices for its computers and iPads because of the higher costs. Services prices also rose sharply last month, lifted by more expensive restaurant meals, hotel rooms, auto repairs, and health care.

• At the same time, consumers appear willing to keep spending and boost the economy. Adjusted for inflation, spending rose 0.3% from April to May. And inflation-adjusted incomes rose for the first time in four months, picking up 0.3%, which could bolster consumer spending in the coming months.
• A separate report Thursday showed that the economy expanded at a 2.1% annual rate in the first three months of the year, an upgrade from a previous estimate of 1.6%. And the number of people seeking unemployment benefits fell last week, a sign that layoffs remain low.
• Trump responded to the CPI report earlier this month by saying he "loved the inflation." He has previously dismissed Democrats' focus on "affordability" as a "hoax." Inflation jumped to 9.1% under Joe Biden, but even as it fell back closer to 2% in 2024, voters remained angry about the cumulative rise in the cost of groceries, rent, and other necessities.
• The PCE price index was last below 2.5% in April 2025, when Trump unveiled his "Liberation Day" tariffs. Inflation then climbed steadily to 2.9% just before the Iran war.