WASHINGTON (AP) — 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 President Donald Trump and his political party as midterm elections near.
Consumer prices rose 4.1% in May from a year earlier, the 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 U.S. markets this week, hammering fast-growing sectors like tech.
Oil and gas prices have fallen substantially since Trump 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.
Excluding the volatile energy and food categories, core prices rose 3.4% in May compared with a year earlier, up from 3.3% in April and the largest increase since October 2023. On a monthly basis, they rose 0.3% from April to May, the same as the previous month.
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 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 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.
The new inflation data arrives a day after Trump refused to sign housing legislation this week, approved by Congress, that is intended to spur more construction and lower home prices over time, a response to Americans’ concerns about rising costs.
Trump responded to the CPI report earlier this month by saying he “loved the inflation.” He has previously dismissed Democrats’ focus on “affordability” as a “hoax.”
Inflation jumped to 9.1% under former President Joe Biden, but even as it fell back closer to 2% in 2024, voters remained angry about the cumulative rise in the cost of groceries, rent, and other necessities.
The PCE price index was last below 2.5% in April 2025, when Trump unveiled his “Liberation Day” tariffs. Inflation then climbed steadily to 2.9% just before the Iran war.
The inflation increase last month was mostly driven by more expensive gas, and now that gas prices are falling, inflation should follow. Yet other factors have also kept it elevated, including computer equipment and services such as restaurant meals, child care, and video streaming.
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