The Federal Reserve’s preferred inflation measure accelerated in May, underscoring the central bank’s ongoing challenge as officials weigh whether price pressures are proving temporary or more persistent. The personal consumption expenditures index rose 4.1% from a year earlier, the fastest pace since April 2023, while core PCE, which excludes food and energy, increased 3.4%, its highest level since October 2023. Chicago Federal Reserve President Austan Goolsbee said there was a “glimmer of hope” in the latest services inflation data, but added that core inflation remains too high and is moving in the wrong direction.
Goolsbee said the inflation side of the Fed’s dual mandate is currently the clearer problem relative to the labor market. He did not say whether policymakers should raise interest rates or keep them unchanged, instead emphasizing that his view will depend on incoming data. He said policymakers are trying to determine whether the recent rise in inflation reflects persistent forces or temporary factors such as tariffs, higher goods prices, and a jump in gasoline and other fuel-sensitive costs linked to the conflict involving Iran. He also noted that oil prices had surged and could fall back quickly, while warning that elevated services inflation and still-uncertain progress on wages offer no assurance that inflation will ease soon.
The latest report also showed consumers continued spending despite higher prices, though different measures highlighted the strength of demand in different ways. Some economists pointed to inflation-adjusted spending rising 0.3% in May and real incomes also increasing 0.3%, arguing that household demand has remained resilient. Other data in the same release showed nominal personal consumption expenditures and personal income each rising 0.7% for the month, with the saving rate reaching 3%. Analysts cited stronger household finances, including larger tax refunds and stock market gains, as factors that may have helped offset the drag from higher fuel prices.
Views diverged over what the data signal for the path ahead. Some economists said May may mark the high point of the latest inflation burst because crude prices eased in June as concerns over the Strait of Hormuz diminished, potentially reducing pressure on the Fed if lower energy costs feed through to future reports. Others argued the figures reinforce the central bank’s hawkish stance, noting that inflation remains well above the Fed’s 2% target even as growth appears solid. Earlier this month, the Fed kept its benchmark rate unchanged, but projections released after the June 16-17 meeting showed that nine of 18 policymakers who submitted rate-path forecasts expected rates to rise by the end of the year. Fed Chair Kevin Warsh did not submit a projection and has said future decisions will depend on how the data evolve.