PCE inflation hits 4.1%, fueling Fed rate hike doubts

Households got hit with a hotter inflation reading in May as the Federal Reserve’s preferred price gauge rose 4.1% from a year earlier, the fastest annual pace in three years. The Bureau of Economic Analysis said the personal consumption expenditures price index increased 0.4% from April to May, while core PCE, which strips out food and energy, rose 3.4% year over year and 0.3% month over month.

The monthly jump underscored how stubborn inflation remains even after two years of policy tightening. May’s annual PCE increase was the first above 4% since April 2023, after April was revised to 3.8%. Economists had expected the headline reading to come in at 4.1%, so the data landed at the top of forecasts but still pointed to price pressure that is far from fully contained.

The biggest shock came through energy. Reuters reported that the inflation surge was tied in part to higher energy prices after the war with Iran rattled markets across the Middle East, lifting fuel costs and spilling into consumer budgets. Fox Business also linked the hotter reading to that geopolitical shock, while oil prices eased after a preliminary peace deal, fueling hopes that inflation may have peaked in May or was close to peaking.

Even with the inflation jump, consumers kept spending. The BEA said personal consumption expenditures rose $156.1 billion, or 0.7%, in May, while personal income increased $181.6 billion, also 0.7%. That combination suggests households were still spending through the price pressure, even as energy costs squeezed discretionary budgets and threatened to make upcoming summer bills more expensive.

For the Federal Reserve, the report kept the door open to another rate increase later in the year. A firmer-than-expected inflation pace makes it harder for policymakers to pivot quickly toward cuts, and it raises the odds that borrowing costs stay elevated for longer. That would keep pressure on mortgage rates, credit card balances and auto loans, while leaving consumers exposed if energy prices remain volatile after the Middle East conflict.