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Inflation Gauge Jumps to 3-Year High 06/26 06:14
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.
"Underyling inflation is closer to 3% rather than 2%," said Mark Vitner,
chief economist at Piedmont Crescent Capital. "It does suggest to me that the
next Fed move, whenever it comes, is more likely to be a hike than a cut." The
Fed probably won't raise rates until next year, he added.
Oil and gas prices have fallen substantially since Trump agreed to a peace
deal with Iran earlier this month, but the conflict lifted gas prices to nearly
$4.50 a gallon on average nationwide in May. 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.
Declining gas prices will likely pull down headline inflation next month,
yet measures of underlying inflation remain stubbornly elevated and will be a
concern for the Fed. 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.
Higher gas prices aren't the only thing worsening inflation. The AI buildout
has made computer components more expensive, and Apple announced last week that
it would raise prices for its computers and iPads because of the higher costs.
Services prices also rose sharply last month, lifted by more expensive
restaurant meals, hotel rooms, auto repairs, and health care.
At the same time, consumers appear willing to keep spending and boost the
economy. Adjusted for inflation, spending rose 0.3% from April to May. And
inflation-adjusted incomes rose for the first time in four months, picking up
0.3%, which could bolster consumer spending in coming months.
A separate report Thursday showed that the economy expanded at a 2.1% annual
rate in the first three months of the year, an upgrade from a previous estimate
of 1.6%. And the number of people seeking unemployment benefits fell last week,
a sign that layoffs remain low.
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.
Inflation has been above the Fed's 2% target for more than five years,
leaving many Americans more gloomy about the future. Vitner 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, 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.
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