Consumer prices jumped to their highest level in three years during May, driven by a sharp spike in gas costs that threatens to complicate the political landscape ahead of midterm elections. The Federal Reserve's preferred inflation measure rose 4.1% year-over-year, marking the largest annual increase since April 2023.
Month-to-month inflation held steady at 0.4% in May, unchanged from April but a slowdown from the 0.7% climb in March. The acceleration reflects broad cost pressures, with gasoline, semiconductors, and computer equipment leading the charge as businesses race to build out artificial intelligence infrastructure.
Gas prices climbed to nearly $4.50 per gallon on average last month before retreating to $3.92 by Thursday, still roughly 20% above year-ago levels as the summer driving season kicks off. The surge came after geopolitical tension lifted crude costs, though prices have since moderated following peace developments with Iran.
The inflation picture has left the Federal Reserve in a holding pattern. The central bank has kept its benchmark rate unchanged throughout 2025, a stark reversal from earlier projections that anticipated two rate cuts. Some economists now predict the Fed could actually raise rates this year instead, a shift that rattled financial markets and battered growth-dependent sectors like technology.
New Federal Reserve Chair Kevin Warsh signaled last week that policymakers remain committed to bringing inflation back to the central bank's 2% target, though he offered no specifics on how aggressively they might pursue that goal. The ambiguity has left investors uncertain, with some expecting higher rates and others bracing for extended monetary tightness.
On the brighter side, consumer spending proved resilient. Real spending rose 0.3% from April to May, while real incomes picked up 0.3% in their first monthly gain in four months. Those gains could help sustain household purchasing power in coming months if they persist.
The stubbornness of inflation has taken a psychological toll. Prices have remained elevated above the Fed's 2% goal for more than five years, a stretch that feels particularly painful for many households given that inflation stayed below 2.5% for nearly a decade before the pandemic hit. The sharp spikes since then have left Americans notably pessimistic about the economic outlook.
Thursday's report measured the personal consumption expenditures price index, the Fed's preferred gauge because it assigns less weight to housing costs and captures how consumers shift spending patterns when prices rise. The PCE showed similar pressure to the consumer price index released earlier this month.
Author James Rodriguez: "Higher inflation and speculation about rate hikes in an election year is exactly the kind of economic crosscurrent that upends political calculations, and Trump's team will be watching the Fed's next moves very closely."
Comments