Fed’s preferred core inflation gauge rises to 3.4% in May

The Federal Reserve’s preferred core inflation measure rose 3.4% in May from a year earlier, the fastest annual pace since October 2023, according to Commerce Department data released Thursday. Stock futures remained positive after the report, while Treasury yields declined and traders still expected a September rate increase, though with slightly lower odds.

The core personal consumption expenditures price index, which excludes food and energy, increased 0.3% on the month, matching the Dow Jones consensus estimate. The broader PCE price index rose 4.1% from a year earlier, the strongest annual reading since April 2023, and increased 0.4% on the month, according to the Commerce Department. The annual headline figure matched the Dow Jones estimate, while the monthly figure was 0.1 percentage point below expectations.

The PCE index is closely watched because it is the Fed’s primary inflation benchmark. Policymakers monitor both the headline and core measures, but the core gauge is often treated as a clearer signal of underlying price trends because food and energy can move sharply from month to month.

Energy prices again accounted for much of the pressure in May. The Commerce Department data showed prices for energy-related goods and services rose 4% during the month. Housing costs increased 0.3%, while financial services and insurance prices climbed 1.2%.

Heather Long, chief economist at Navy Federal Credit Union, linked the latest inflation pressure to the war in Iran and its effect on household costs. “Inflation is at a 3-year high due to the war in Iran and it’s painful for middle-class and moderate-income Americans,” Long said. “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.”

The inflation data arrived after the Fed, led by Chair Kevin Warsh, delivered a firmer message on price stability at its most recent policy meeting. The Federal Open Market Committee said in its statement that it would “deliver price stability” after inflation had exceeded its 2% target for five years, according to the statement cited in the report. Officials also removed a previously indicated rate cut for this year and signaled the likelihood of a rate increase.

The policy picture remains complicated by the source of the latest price acceleration. Fed officials often look past supply-driven energy shocks, but the report said concerns have increased that price gains are spreading more broadly through the economy and are also being influenced by tariffs.

Household demand nevertheless strengthened in May. Personal consumption expenditures, a measure used as a proxy for consumer spending, rose 0.7% for the month, 0.1 percentage point above the Dow Jones forecast and faster than the monthly inflation rate. Personal income also increased 0.7%, ahead of the 0.4% estimate. The personal saving rate rose to 3%.

Separate data released Thursday pointed to steadier economic activity than previously reported. The Commerce Department said gross domestic product grew at a seasonally adjusted annualized rate of 2.1% in the first quarter, the final reading for the period. That was higher than the prior estimate of 1.6% and above the 1.7% forecast. The department said the revision mostly reflected a lower estimate for imports, which reduce GDP in the calculation.

The labor market also showed fewer new claims for unemployment benefits. Initial jobless claims fell to 215,000 for the week ended June 20, down 12,000 from the previous reading and below the 223,000 estimate, according to Labor Department data.

This story draws on original reporting from CNBC.