Core inflation rose again in May, giving the Federal Reserve another difficult reading as households continued to face higher prices for fuel, services and goods tied to the technology buildout.
The core personal consumption expenditures price index, which excludes food and energy, increased 3.4% from a year earlier, according to the latest Personal Income and Outlays report from the Bureau of Economic Analysis. That was up from 3.3% in April and marked the highest core PCE reading since late 2023.
The broader PCE price index rose 4.1% from a year earlier. On a monthly basis, headline PCE inflation increased 0.4%, while core PCE increased 0.3%.
The report was closely watched because PCE is the inflation measure the Federal Reserve follows most closely when setting interest-rate policy. The data showed that inflation pressure remained above the Fed 2% target, even as consumers kept spending.
What The May PCE Report Showed?
The May report showed higher income, higher spending and higher prices at the same time.
Personal income increased 0.7% in May. Disposable personal income, which measures income after personal taxes, also rose 0.7%. Consumer spending rose 0.7%, while real consumer spending, adjusted for inflation, rose 0.3%.
That combination points to a consumer economy that still had momentum, but one where price increases took part of the gain from household budgets.
The personal saving rate was 3.0% in May. That figure shows households were still spending, but many families had limited room to absorb another round of price increases without pulling back elsewhere.
Headline Inflation reached 4.1%
Headline inflation includes food and energy, which can move sharply from month to month. Core inflation removes those two categories, giving economists and policymakers a clearer look at the underlying price trend.
That does not mean food and gas are less important to families. They matter every week at the pump and grocery store. Core inflation simply helps show whether price pressure is spreading beyond volatile items.
In May, both measures were elevated. Headline PCE reached 4.1%, while core PCE rose to 3.4%. That makes the report harder for the Fed to dismiss as only an energy story.
Gas Prices Helped Push The Headline Number Higher
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Energy played a large role in the May jump. The Associated Press reported that higher gas prices were one of the main drivers, after the conflict involving Iran pushed national gasoline prices close to $4.50 a gallon before easing.
The AP also pointed to higher costs for semiconductors and computer equipment used in artificial intelligence infrastructure as another source of pressure in the report on May inflation reaching a three-year high.
That detail is important because price pressure came from both household energy costs and business-related goods used in major investment sectors. Fuel hits consumers directly. Technology hardware can feed into company costs and future pricing.
What This Means For The Federal Reserve?
The Federal Reserve has two main problems. Inflation is still above target, and consumer spending has not weakened enough to make the inflation problem disappear on its own.
That reduces the case for rate cuts in the near term. It also keeps open the possibility that policymakers may need to hold rates higher for longer, or even consider another increase if price pressure continues.
For households, that means borrowing costs on credit cards, auto loans and other consumer debt may stay elevated. For businesses, it can mean higher financing costs and tighter investment decisions.
We have covered the wider price trend in our guide to U.S. inflation. The May PCE report adds another sign that the final stretch back to the Fed target remains difficult.
The report also connects to the labor market. Consumers can keep spending when wages and jobs hold up. A weaker labor market would change that picture quickly. We track that side of the economy in our report on the U.S. unemployment rate.
What To Watch Next
The next PCE report, covering June, is scheduled for July 30. That report will show whether the May spike was temporary or part of a longer inflation rebound.
Gas prices will be one area to watch. If energy prices ease, headline inflation could cool. Core inflation will be the more important test for the Fed because it shows whether underlying pressure is still moving higher.
The May report leaves a clear message: inflation is still running too hot for comfort, and the Fed has less room to cut rates while core PCE is moving away from its target.
