The US Personal Consumption Expenditures (PCE) price index, the Fed’s preferred measure of inflation, rose 4.1% year over year in May from an unrevised 3.8% the previous month, in line with expectations.
The May figure shows the biggest increase and the first break above 4.0% in more than three years, with inflation moving away from the central bank’s 2% target, adding to growing bets on a Fed rate hike, as early as September.
The core PCE index, which excludes the more volatile food and energy components, rose 3.4% year-on-year in May after rising 3.3% in April, also in line with expectations.
The Fed kept its benchmark overnight interest rate in a range of 3.50%-3.75% at its policy meeting last week, but updated quarterly forecasts showed policymakers expect borrowing costs to rise this year amid growing concerns about inflation.
Economists expect inflation, caused by the US-Israel war against Iran, to remain high for some time despite the recent decline in oil prices due to the ceasefire and initial peace agreement that continues to fuel optimism.
A separate report showed that consumer spending, which accounts for more than two-thirds of economic activity, jumped 0.7% in May compared to a 0.4% rise in April.
The data also showed that consumers maintained their spending, as large tax refunds and a higher stock market partially offset the negative impact of higher fuel prices.
Although higher spending reflects higher prices, May data also suggests that consumption may be on track to accelerate in the second quarter after slowing in the first three months of the year.
