The PCE increase was largely driven by more expensive gas. (Rogelio V. Solis/AP/File)
key takeaways:
- The Federal Reserve’s preferred inflation gauge rose 4.1% in May from a year earlier, the most since April 2023, driven mainly by higher gas prices.
- Rising costs of fuels, semiconductors and services have kept inflation above the Fed’s 2% target, complicating policy and hurting affordability, although spending and income have increased modestly.
- Lower gas prices following the US-Iran deal may ease inflation, but economists expect the Fed to keep or possibly raise interest rates as it seeks to curb price rises.
WASHINGTON — The Federal Reserve’s preferred inflation gauge rose to a new three-year high in May as gas prices peaked, a sign that rising costs could create political problems for President Donald Trump and his political party closer to the midterm elections.
The Commerce Department said on June 25 that consumer prices rose 4.1% in May from a year earlier, the largest annual increase since April 2023. On a monthly basis, inflation stood at 0.4% last month, equal to April’s rise and down from 0.7% in March.
This increase was primarily due to more expensive gas, as well as expensive semiconductors and other computer equipment, which are in high demand for AI buildouts.
Rising prices have prompted inflation fighters at the Federal Reserve to keep their key rate unchanged this year, unlike in January when they had planned two cuts.
Some economists predict that the central bank may raise rates this year.
New Fed Chairman Kevin Wersh last week underlined the central bank’s determination to get inflation back to its 2% target, but he gave no indication of what steps the Fed might take. However, some economists now expect the central bank to raise rates this year. Those expectations sent U.S. markets reeling this week, hurting fast-growing sectors like technology.
Oil and gas prices have fallen significantly since Trump agreed to a peace deal with Iran, but the conflict caused gas prices nationwide to average about $4.50 a gallon last month. As of June 25, they have fallen to $3.92, according to AAA, but that’s more than 20% from prices at this time last year as driving season begins.
Excluding volatile energy and food categories, core prices rose 3.4% in May from a year earlier, up from 3.3% in April and the biggest increase since October 2023. On a monthly basis, they rose 0.3% from April to May, the same as the previous month.
The June 25 report also showed that consumer spending grew at a solid pace. Adjusted for inflation, spending increased 0.3% from April to May.
Simply: PCE inflation rose to 4.1% (y/y) in May – the highest inflation in 3 years and mainly due to the impact of the war in Iran.
Core PCE inflation (excl. food and energy) rises to 3.4% -> highest since fall 2023.
This is sad for the middle class and… pic.twitter.com/KxrHvA5pEF
– Heather Long (@byHeatherLong) 25 June 2026
And income, adjusted for inflation, rose 0.3% for the first time in four months, which could boost consumer spending in coming months.
Inflation has remained above the Fed’s 2% target for more than five years, making many Americans more pessimistic about the future. Mark Wittner, chief economist at Piedmont Crescent Capital, points out that inflation had not been above 2.5% for nearly a decade before the pandemic, perhaps making the rise in inflation since then even more difficult for most households to accept.
The June 25 report covers the Personal Consumption Expenditures Price Index, a lesser-known measure than the Consumer Price Index, which was released earlier this month and saw a similarly large increase. The Fed prefers the PCE index because it weighs less on housing and also reflects changes in Americans’ purchasing patterns when prices rise, such as when consumers buy cheaper off-brand items.
The new inflation data comes a day after Trump refused to sign housing legislation approved by Congress this week that aims to spur more construction and lower home prices over time, a response to Americans’ concerns about rising costs.
Trump responded to the CPI report earlier this month by saying he “loves inflation.” He previously dismissed the Democrats’ focus on “affordability” as a “fraud.”
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Inflation rose to 9.1% under former President Joe Biden, but despite it falling closer to 2% in 2024, voters remained angry about the cumulative increase in the cost of groceries, rent and other necessities.
The PCE price index was last below 2.5% in April 2025, when Trump unveiled his “Liberation Day” tariffs. Inflation climbed steadily to 2.9% just before the Iran war.
The increase in inflation last month was mostly due to more expensive gas, and now that gas prices are falling, inflation should follow. Yet other factors also kept it high, including computer equipment and services like restaurant dining, child care and video streaming.
