Inflation heats up as Fed’s key gauge reaches 2023 high

WASHINGTON — Inflation accelerated again in May, as the Federal Reserve’s preferred measure climbed to its highest level since 2023, adding pressure on policymakers as higher energy costs and broader price increases continue to weigh on consumers.

The Commerce Department reported Thursday that the core Personal Consumption Expenditures (PCE) price index, which excludes food and energy, rose 0.3% in May and 3.4% over the past year. The annual core inflation rate was the highest since October 2023 and matched economists’ expectations.

Headline PCE inflation rose 0.4% for the month and 4.1% annually, marking its highest level since April 2023. While energy remained the largest driver of inflation, with energy-related goods and services up 4% for the month, housing costs rose 0.3%, and financial services and insurance increased 1.2%, suggesting inflationary pressures are becoming more widespread.

“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.”

Despite rising prices, consumer spending remained resilient. Personal consumption expenditures rose 0.7% in May, beating expectations and outpacing the monthly inflation rate. Personal income also rose 0.7%, while the personal saving rate edged up to 3%.

The report follows last week's Federal Reserve meeting, where policymakers reinforced their commitment to restoring price stability. Officials removed prior guidance suggesting a rate cut this year and instead signaled that another rate hike is likely, while markets continue to expect an increase at the September meeting.

For retailers and consumer goods companies, persistent inflation presents a mixed picture. Strong consumer spending suggests demand remains intact, but elevated prices for fuel, utilities, and other essentials continue to strain household budgets and could influence purchasing behavior in the months ahead as the Fed weighs further monetary tightening.