San Francisco Frontiers - US Fed's preferred inflation gauge hits fresh three-year high

The personal consumption expenditures (PCE) prices index jumped 4.1 percent from a year ago, the Commerce Department said Thursday, up from 3.8 percent in April.

The US-Israel war on Iran has sent global energy prices skyrocketing and snarled supply chains, as Tehran's retaliatory action targeted Washington's regional allies and virtually blocked the Strait of Hormuz.

Washington and Tehran are in the midst of peace negotiations, but markets continue to deal with a high degree of uncertainty and economists warn it will take months for fuel prices to come down to pre-war levels.

Trump has dismissed recent surging inflation data as being temporary, insisting that prices will come down "like a rock" once the war is over.

Economists and oil industry experts say this is unlikely, as it will take months to ramp production back up to normal levels and to resume regular traffic through the Strait. Negotiations over the key commercial waterway are ongoing.

Still, some analysts believe US inflation has hit a peak and will begin to slow as oil prices fall in the wake of the peace negotiations, as the major contracts for Brent and West Texas Intermediate have begun to do.

"The good news is gas prices have come down substantially since May," said Heather Long, chief economist at Navy Federal Credit Union.

"Some relief has already come for American households and this should translate to cooler inflation readings in June and beyond."

Affordability is a key political issue in November's US midterm elections, with the Democratic Party hoping to wrest control of both houses of Congress from Trump's Republicans.

"Trump promised to lower costs on 'Day One,' but he's made clear he just doesn't care," said Democratic Senator Elizabeth Warren in response to the latest inflation data.

- GDP boost -

In positive news for the world's largest economy, however, the Commerce Department revised its first-quarter GDP growth estimates up by 0.6 percentage points to 2.1 percent on Thursday.

The new revision was "primarily reflecting a downward revision to imports, which are a subtraction in the calculation of GDP, that was partly offset by a downward revision to consumer spending," the department said.

Among the biggest contributors to the increase was information services, which includes parts of the burgeoning artificial intelligence (AI) industry that has powered recent US growth.

The revision was far in excess of market expectations, with economists polled by Dow Jones Newswires and the Wall Street Journal expecting the figure to rise by only 0.1 percentage points.

- Fed implications -

Thursday's inflation data, however, was well in line with analyst's expectations, as high fuel prices have begun to ripple outwards across the US economy.

Core PCE inflation, which strips out volatile food and energy prices, rose by 3.4 percent year-on-year -- the highest rise since October 2023.

Rising fuel prices saw US consumers spend $151.2 billion more on gasoline and related products in May over the same month a year ago, the data showed.

The average price of a gallon of regular gasoline in the United States is still about 31 percent higher than at the start of the war, according to the AAA motor club.

The new data on Thursday showed US personal consumption expenditures rose by 0.7 percent, with disposable personal income increasing by the same amount.

US Federal Reserve policymakers have flagged rising concerns about sustained inflation, which has remained above its long-term two-percent target for more than five years.

At their last meeting this month, policymakers voted unanimously to hold interest rates steady for the fourth straight meeting, with about half of them signaling that rate hikes were on the horizon for 2026.

R.Baker--SFF