US Inflation Hits Three-Year High in May, Driven by Gas and Tech Costs

The Federal Reserve’s preferred inflation gauge rose to a new three-year high in May as gas prices peaked, a sign rising costs could pose political problems for Donald Trump and his political party as midterm elections near.

Consumer prices rose 4.1% in May from a year earlier, the US commerce department said Thursday, the largest annual increase since April 2023. On a monthly basis, inflation was 0.4% last month, matching April’s increase and down from 0.7% in March.

The increase was largely driven by more expensive gas, as well as pricier semiconductors and other computer equipment that are in high demand for the AI buildout. Rising prices have caused the inflation-fighters at the Federal Reserve to keep their key rate unchanged this year, a reversal from January when they had penciled in two cuts. Some economists forecast the central bank could lift rates this year instead.

New Fed chair Kevin Warsh last week underscored the central bank’s determination to drive inflation back to its 2% target, but he gave no sign of what steps the Fed might take. Some economists, however, now expect the central bank to increase rates this year. Those expectations upended US markets this week, hammering fast-growing sectors like tech.

Oil and gas prices have fallen substantially since the US president agreed to a peace deal with Iran, but the conflict lifted gas prices to nearly $4.50 a gallon on average nationwide last month. They have since fallen back to $3.92 as of Thursday, according to AAA, but that’s more than 20% above prices at this time last year as the driving season gets underway.

Thursday’s report also showed that consumer spending rose at a solid pace. Adjusted for inflation, spending rose 0.3% from April to May.

And incomes, adjusted for inflation, rose for the first time in four months, picking up 0.3%, which could bolster consumer spending in the coming months.

Inflation has been above the Fed’s 2% target for more than five years, leaving many Americans more gloomy about the future. Mark Vitner, chief economist at Piedmont Crescent Capital, points out that inflation hadn’t topped 2.5% for nearly a decade before the pandemic, likely making the inflation spikes since then even harder to accept for most households.

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