Fed's Preferred Inflation Gauge Hits 4.1% in May, Highest Since 2023
The Personal Consumption Expenditures price index rose to 4.1% annually in May 2026, the highest level in three years. The surge reflects ongoing inflation pressures from the Iran conflict's impact on oil and energy prices, though some analysts expect this may mark the peak of the latest inflation surge as crude prices have begun easing.
Inflation Accelerates Despite Oil Price Easing
The Personal Consumption Expenditures index—the inflation-surges-to-42percent-in-may-highest-level-since-april-2023-zcpbY4Q3">Federal Reserve's preferred inflation measure—rose at a 4.1% annual rate in May, the highest level since April 2023. Core PCE, which strips out volatile energy and food prices, rose 3.4%, slightly higher than the 3.3% forecast by economists.
Energy Shock Drives Price Increases
The Iran war reignited inflation by driving up oil and gasoline prices, leaving American drivers paying the highest fuel costs in three years. The AI buildout has made computer components more expensive, with Apple announcing last week that it would raise prices on its computers and iPads due to higher costs. Service prices also rose sharply last month, driven by costlier restaurant meals, hotel rooms, auto repairs and healthcare.
Fed Response and Economic Outlook
Federal Reserve Chairman Kevin Warsh vowed to tackle inflation at his first interest-rate decision meeting, saying the central bank is determined to lower inflation to 2% annually. The Fed held its benchmark interest rate steady at its June 17 meeting, but left the door open to a rate hike later this year. A separate government report on 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.
Path Forward
May's PCE report could mark the peak of the latest inflation surge because crude oil prices eased in June amid hopes that the Strait of Hormuz, the key Persian Gulf waterway that handles 20% of global oil flows, could soon reopen. The combination of stronger GDP growth and lower energy prices may keep the Fed from budging interest rates anytime soon.