The Fed’s preferred inflation index, the PCE, was up 4.1 percent last month, a three-year high. This was the largest annual increase since April 2023. The PCE was up 0.4 percent monthly, the same as seen in April, but down from the 0.7 percent experienced in March.
The main driver of the surge in inflation has been gas prices because of the war in Iraq, along with computer equipment whose prices are being driven by the AI buildout. Underlying inflation is running closer to 3 percent, rather than the Fed’s 2 percent target.
Falling gas prices will likely cause inflation to drop next month, but core inflation remains stubborn as consumers are willing to keep spending and boost the economy. The US economy expanded at a 2.1 percent annualized rate in Q1, and the labor market seems to be holding steady.
Rising inflation has caused the Fed to keep interest rates unchanged this year, which has, likely, ruled out the two rate cuts that were predicted in January. Economists are now forecasting rate hikes instead, which are not anticipated to happen until 2027.