U.S. inflation rate surpassed 4% in May for the first time in three years, driven by rising energy costs amid Middle East tensions.
The Bureau of Economic Analysis (BEA) reported on Friday that the Personal Consumption Expenditures (PCE) price index rose 4.1% year-over-year last month, matching market expectations. This marks the highest level since April 2023.
Month-over-month, the index increased by 0.4%, slightly below the anticipated 0.5%. April’s PCE inflation rate remained steady at 3.8%.
The core PCE price index, which excludes volatile food and energy prices, climbed 3.4% year-over-year and 0.3% month-over-month. April’s figure held steady at 3.3%.
The Federal Reserve relies on the PCE price index as its primary gauge for its 2% inflation target.
At the recent Federal Open Market Committee (FOMC) meeting on June 17, the first under Chairman Kevin Warsh, the Fed maintained the benchmark interest rate at 3.50% to 3.75%.
However, growing inflation concerns have increased the likelihood of Fed rate hikes this year, according to Reuters analysts. Financial markets now anticipate imminent rate increases, with further hikes expected to follow.
Despite rising prices, consumer spending in May grew by 0.7% month-over-month, surpassing April’s 0.4% increase.
Reuters noted that consumers have sustained spending levels, buoyed by larger tax refunds and a robust stock market, which have helped offset the impact of higher fuel costs.
However, as inflation outpaces wage growth, tax refund effects diminish, and savings dwindle, analysts project that households will likely curtail spending in the third quarter.