Inflation in the United States edged higher in May, with the personal consumption expenditures (PCE) price index rising 4.1% on a 12-month basis, the largest annual increase and the first above 4.0% since April 2023, the Commerce Department's Bureau of Economic Analysis reported. The headline PCE reading follows an unrevised 3.8% annual gain in April.
Month-to-month, the PCE price index climbed 0.4% in May, matching April's monthly pace of increase. Excluding the more volatile food and energy components, core PCE advanced 3.4% from a year earlier in May, up from 3.3% in April. Core PCE also rose 0.3% on a monthly basis, the same monthly gain recorded in April.
Analysts surveyed by Reuters had anticipated a 4.1% annual rise in the PCE price index, consistent with the actual result. The U.S. central bank uses PCE inflation measures to assess progress toward its 2% objective. Federal Reserve officials left the federal funds rate in a 3.50%-3.75% range at their most recent meeting, but updated projections released at the same time showed policymakers expect additional rate increases this year amid renewed concerns about inflation.
Market pricing reflects those concerns, with traders assigning a meaningful probability to a rate increase as soon as September, and expecting at least one further tightening thereafter.
Energy costs were a key driver of the May inflation reading. The U.S.-led war against Iran has elevated crude prices and pushed gasoline costs higher. Although oil and gasoline prices have fallen back in recent weeks following a fragile ceasefire, forecasters in the period surrounding the report expected inflationary pressures to remain elevated for some time.
In a development noted in the PCE report's backdrop, President Donald Trump and his Iranian counterpart Masoud Pezeshkian last week signed a preliminary peace deal that would reopen oil and other shipping lanes frozen by the war. The conflict had earlier strained global energy markets and contributed to the recent rise in headline inflation.
Household finances have been strained by elevated consumer prices even before the conflict, with higher costs traced in part to sweeping import tariffs enacted under the Trump administration. Officials and observers have pointed to the higher cost of living as a political vulnerability for Mr. Trump and the Republican Party ahead of midterm congressional elections in November. The report also noted that Trump's 2024 election victory was partly attributed to his promise to lower inflation.
Despite the higher inflation readings, consumer spending remained resilient in May. Personal consumption expenditures - which account for more than two-thirds of U.S. economic activity - rose 0.7% in May after a 0.4% increase in April. Some of the increase in nominal spending reflects the effect of higher prices, but on current measures consumption appears poised to pick up in the second quarter following a slowdown in the January-March period.
Gross domestic product trackers are currently estimating second-quarter growth at rates as high as a 3.0% annualized pace. That said, the report emphasized constraints on household spending going forward: real incomes have not kept pace with inflation, the tax filing season has concluded, and households are drawing down savings and reducing their saving rates. Given those developments, economists expect consumer outlays to moderate in the third quarter.
The broader inflation picture shows both headline and core PCE had last been below the Federal Reserve's 2% target in early 2021. With the central bank indicating a willingness to raise borrowing costs further in response to persistent inflation, the intersection of energy-driven price shocks and still-robust consumption will be closely watched by markets and policymakers.
Data points referenced in this report
- Headline PCE inflation: 4.1% year-on-year in May (April: 3.8%)
- Monthly headline PCE: 0.4% in May (April: 0.4%)
- Core PCE inflation: 3.4% year-on-year in May (April: 3.3%)
- Monthly core PCE: 0.3% in May (April: 0.3%)
- Federal funds rate range: 3.50%-3.75%
- Consumer spending: +0.7% in May (April: +0.4%)
- Second-quarter GDP estimates: as high as a 3.0% annualized rate
This report synthesizes the Commerce Department's PCE release and related commentary on consumer behavior and monetary policy without introducing additional data or analysis beyond the reported figures and developments.