US inflation hits three-year high as consumer spending stays strong

Headline inflation climbed to a three-year high in May, with the Federal Reserve’s preferred gauge rising 4.1% from a year earlier as higher energy costs tied to the Iran conflict pushed up prices. At the same time, consumer spending stayed firm, giving policymakers little immediate room to ease borrowing costs.

The Bureau of Economic Analysis said the personal consumption expenditures price index rose 0.4% from April to May, a sign that price pressures were not confined to one volatile month. The core PCE index, which strips out food and energy and is watched closely for underlying inflation, increased 3.4% from a year earlier, the highest since October 2023. The Fed targets 2% inflation over the longer run on the PCE measure.

That mix leaves the central bank facing a harder call. The Federal Open Market Committee kept the federal funds rate at 3.5% to 3.75% at its June 17 meeting, saying economic activity was expanding at a solid pace even as uncertainty remained elevated because of tensions in the Middle East. With headline inflation back above 4% and core inflation still well above the Fed’s goal, any move toward rate cuts is likely to be delayed.

The spending data reinforced that picture. Personal consumption expenditures rose $156.1 billion, or 0.7%, in May. Services accounted for $94.3 billion of that increase, while goods spending added $61.8 billion. Personal income also rose $181.6 billion, or 0.7%, and the personal saving rate held at 3.0%, suggesting households were still spending from a position of relative strength rather than retrenching sharply.

For households, the implications are immediate. If the Fed keeps rates elevated for longer, mortgage borrowers face a slower path to relief, credit card rates are likely to stay high, and consumers could become more cautious as inflation erodes purchasing power. The latest figures show why policymakers remain wary: the shock from energy prices is feeding the headline number, but the persistence in core inflation and steady demand point to broader price pressure that could keep the inflation fight alive well into the second half of the year.