Key Fed inflation gauge rises to three-year high in May after gas prices peaked | US economy

The Federal Reserve’s preferred inflation gauge rose to a three-year high in May as gas prices peaked; This is a sign that rising costs could create political problems for Donald Trump and his political party as the midterm elections approach.

Consumer prices rose 4.1% in May from a year ago, the biggest annual increase since April 2023, the U.S. Commerce Department said Thursday. On a monthly basis, inflation was 0.4% last month, decreasing from 0.7% in March, in line with the increase in April.

The increase was largely driven by more expensive gas, as well as more expensive semiconductors and other computer equipment in high demand for artificial intelligence fabric. Rising prices have led inflation-fighters at the Fed to keep interest rates unchanged this year; This was in stark contrast to how they had predicted two rate cuts in January. Some economists predict that the central bank may raise interest rates this year.

New Fed governor Kevin Warsh last week underlined the central bank’s determination to return inflation to its 2% target but gave no indication of what steps the Fed might take. But some economists now expect the central bank to raise interest rates this year. These expectations have roiled US markets this week and negatively impacted fast-growing sectors such as technology.

Oil and gas prices have fallen significantly since Trump signed a peace deal with Iran, but the conflict has driven gas prices up to an average of about $4.50 per gallon nationwide last month. They have since fallen to $3.92 as of Thursday, according to AAA, but that’s still more than 20% above prices this time last year as driving season gets underway.

Thursday’s report also showed consumer spending rising at a solid pace. When adjusted for inflation, spending increased 0.3% from April to May.

Inflation-adjusted incomes may increase by 0.3% for the first time in four months, supporting consumer spending in the coming months.

Inflation has been above the Fed’s 2 percent target for more than five years, causing many Americans to become more pessimistic about the future. Mark Vitner, chief economist at Piedmont Crescent Capital, points out that inflation did not rise above 2.5% for nearly a decade before the pandemic, which likely made increases in inflation since then even harder to accept for most households.

Thursday’s report covers the personal consumption expenditures price index, a lesser-known measure compared to the consumer price index released earlier this month, which showed a similarly large increase. The Fed prefers the PCE index because it puts less weight on housing and also reflects changes in the way Americans shop when prices rise, such as consumers buying cheaper unbranded items.