US Inflation Hits 3-Year High as Iran War Energy Surge Spreads Through Economy

The Federal Reserve’s preferred inflation measure climbed to its highest level in over three years in May, as energy price increases tied to the Iran war continued bleeding into broader parts of the economy, keeping pressure on the central bank to raise rates.

The Personal Consumption Expenditures price index rose 4.1% on an annual basis, the highest reading since April 2023, according to Commerce Department data released Thursday. The monthly gain came in at 0.4%. Energy goods and services led the way, rising 4% for the month alone.

Stripping out food and energy, core PCE advanced 3.4% year-over-year after a 0.3% monthly gain, its highest point since October 2023. Both readings matched expectations. Housing costs edged up 0.3%, and financial services and insurance posted a 1.2% jump, underscoring concerns that price pressures are no longer confined to the energy sector. Tariffs are also increasingly seen as a contributing factor.

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Consumer spending held up despite the inflation pressure. Personal consumption rose 0.7% for the month, beating forecasts by 0.1 percentage point and outpacing the inflation rate. Personal income climbed 0.7% as well, well above the 0.4% forecast, and the personal saving rate edged up to 3%.

Elsewhere in Thursday’s data, Q1 GDP was revised up to a 2.1% annualized pace from a prior reading of 1.6%, with the improvement largely driven by a downward revision to imports. On the labor market side, the 223,000 forecast for weekly unemployment filings proved too pessimistic, with new claims for the period ending June 20 coming in at 215,000, a decline of 12,000 from the previous week.

One potential relief valve for inflation is that oil tankers have resumed movement through the Strait of Hormuz, and gas prices have begun declining. Whether that translates into meaningfully slower inflation in the months ahead remains the key question for the Fed heading into its September meeting.

The report lands roughly two weeks after new Fed Chair Kevin Warsh and the Federal Open Market Committee delivered a decidedly hawkish pivot. The post-meeting statement dropped previously telegraphed rate-cut language and replaced it with an unequivocal commitment to “deliver price stability,” while officials signalled the likelihood of a hike later this year.

Markets are currently pricing in a rate increase in September, though odds slipped slightly following Thursday’s data. President Trump has repeatedly called for rate cuts, and tapped Warsh in part for his alignment with that view, but persistent inflation has pushed that timeline further out.

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