The Federal Reserve's preferred inflation measure hit its highest level in nearly three years in May, according to data released Thursday by the U.S. Bureau of Economic Analysis. The core personal consumption expenditures price index, which strips out food and energy, rose 3.4% from a year ago. That matched the Dow Jones consensus estimate and was the highest annual core reading since October 2023.
The all-items PCE index rose even faster, climbing 4.1% on an annual basis. That is the highest since April 2023. On a monthly basis, the overall PCE index increased 0.4%, while core PCE rose 0.3% for the month, according to CNBC.
Energy costs led the monthly price gains, with energy-related goods and services rising 4% in May alone. Housing costs rose 0.3% for the month. Financial services and insurance jumped 1.2%. Fed officials generally consider core PCE a better measure of long-run inflation trends, but concerns are growing that price increases originally driven by energy are spreading more broadly through the economy.
"Inflation is at a 3-year high due to the war in Iran and it's painful for middle-class and moderate-income Americans," said Heather Long, chief economist at Navy Federal Credit Union. "People are spending more on gas, along with healthcare and utilities. New Fed Chair Kevin Warsh has made his commitment clear to bring inflation down. The key will be how much relief happens by September."
Fed Chair Kevin Warsh and the Federal Open Market Committee recently issued what markets widely described as tough talk on rates. The FOMC adopted language in its post-meeting statement saying it would deliver price stability after missing its 2% inflation target for five years. Officials also removed a previously indicated rate cut for this year and signaled a possible rate hike instead. Traders continued to expect a rate hike in September following Thursday's report, though they lowered the odds slightly. Stock market futures held in positive territory after the release, while Treasury yields slipped.
Despite the elevated prices, consumers kept spending. Personal consumption expenditures rose 0.7% for the month, which was 0.1 percentage point above forecasts and ahead of the inflation rate for the period. The BEA reported that personal income also climbed 0.7%, well above the 0.4% forecast. The personal saving rate rose to 3.0%.
The BEA noted that the May income increase was driven primarily by farm proprietors' income and compensation. The farm income gain reflected a second round of Supplemental Disaster Relief Program payments issued by the U.S. Department of Agriculture under the American Relief Act of 2025. Within compensation, private wages and salaries led the increase.
On a broader timeline, the BEA's third estimate of first-quarter 2026 GDP showed the economy grew at an annual rate of 2.1%, revised up 0.5 percentage point from the second estimate. That compares to growth of just 0.5% in the fourth quarter of 2025. The first-quarter PCE price index came in at 4.6% on an annual basis in that report, also revised up slightly. Real GDP increased in 46 states and the District of Columbia during the first quarter. Washington state led all states with growth of 4.5%, while South Dakota saw a decline of 1.6%.
The next personal income and outlays report covering June 2026 is scheduled for release on July 30, 2026.
