The personal consumption expenditures price index rose 4.1 per cent in the year to May, the US Commerce Department reported on Thursday, the fastest pace since April 2023 and up from 3.8 per cent in April. Core PCE inflation, which strips out volatile food and energy costs, accelerated to 3.4 per cent, its highest since October 2023. The data, which matched consensus forecasts, pushed the Federal Reserve’s primary inflation measure further above its 2 per cent target and cemented market expectations that the central bank will raise interest rates this year.

The surge was driven largely by energy prices after the US-led military campaign against Iran disrupted oil shipments through the Strait of Hormuz. Average US petrol prices approached $4.50 a gallon in May, though they have since retreated to $3.92 as Washington and Tehran pursue peace negotiations and tanker traffic slowly resumes. The energy shock has rippled into other categories, with higher costs for semiconductors and computer equipment linked to artificial intelligence deployment also contributing. A separate report showed the US economy grew at an annualised 2.1 per cent in the first quarter, revised up from 1.6 per cent, indicating underlying resilience that gives the Fed room to tighten policy without immediately threatening growth.

The persistence of inflation carries political weight ahead of November’s midterm elections. Democratic Senator Elizabeth Warren said Trump, who campaigned on lowering costs, “has made clear he just doesn’t care.” Consumer spending rose 0.7 per cent in May, supported by larger tax refunds and a stock market rally, but households are saving less and real wage gains remain negative. Heather Long, chief economist at Navy Federal Credit Union, noted that the recent fall in petrol prices “should translate to cooler inflation readings in June and beyond,” though other analysts caution that services inflation remains sticky and may not ease as quickly.

The Federal Reserve, under new chair Kevin Warsh, held its benchmark rate at 3.50–3.75 per cent last week but signalled that rate increases are likely this year. Financial markets now price an 80 per cent probability of a hike by the September meeting. The next consumer price report for June, due in mid-July, will show whether the decline in energy costs is feeding through to the headline index, setting the stage for the Fed’s next policy decision.