A key measure of inflation rose in May, the Bureau of Economic Analysis reported Thursday, reflecting the ongoing economic impact of the war against Iran.
The Personal Consumption Expenditures price index, which is the preferred inflation measure of the Federal Reserve, rose 0.4% on a monthly basis and 4.1% on a yearly basis. The monthly reading was stable from the month before, but the annual number was higher than April’s 3.8% reading and the highest since April 2023.
Perhaps more worrisome, growth in the core PCE index — which ignores volatile food and fuel prices — also accelerated, rising 0.3% on a monthly basis and 3.4% on a yearly basis. The core index provides a clearer sense of the underlying trend, and while the monthly reading was stable from April to May, the annual reading rose by a tenth of a percentage point, indicating that upward pressure on prices is significant and rising, even if energy prices are ignored.
Almost over or more to come? Many economists think headline inflation likely topped out in May, when oil and gasoline prices hit highs during the war with Iran. Since then, as the war has wound down, oil prices have dropped 30% or more. That drop should be reflected in the June inflation numbers.
“It is highly likely that inflation peaked in May, given the sharp 38.8% decline in West Texas Intermediate oil prices from its May apex, so one should expect a negative month-over-month print across the June inflation data,” said Joseph Bruseulas, chief economist at RSM, in a research note. “This means the 0.4% month-over-month increase and 4.1% advance in inflation from one year ago is a stale number.”
That doesn’t mean that consumers are out of the woods just yet, though. For one thing, the higher prices generated by past inflation are here to stay, with no relief in sight. “This is painful for the middle class and moderate income Americans,” said Heather Long, chief economist at Navy Federal Credit Union. “The monthly gain (0.4%) was a bit softer than expected, but the key will be how fast does inflation cool this summer?”
The core PCE inflation numbers indicate that there is more inflation in the pipeline, suggesting that inflationary pressure could be stubborn and slow to dissipate. Even as oil prices retreat, the cost of other essentials including healthcare and insurance continues to rise, with no signs of easing.
On top of that, the massive buildout of artificial intelligence infrastructure appears to be adding more inflationary pressure to the economy. Apple shares fell sharply Thursday after the company warned that its costs were rising due to the skyrocketing price of memory chips, which are being gobbled up by AI firms. Higher tech prices could ripple through the economy, touching on a wide variety of sectors.
RSM’s Brusuelas said that when all the factors — which also include higher defense spending and the ongoing effects of elevated tariffs — are taken together, the likely result is “a challenging core inflationary picture going forward.”
That could be a problem for the Federal Reserve as it crafts monetary policy in the coming months, and it’s a major reason that some analysts believe that the central bank could raise interest rates at some point later in the year.
The bottom line: Inflation may have peaked, but it could be quite some time before the inflation rate comes back down to the Fed’s 2% target.
