The Federal Reserve's preferred inflation gauge accelerated to its fastest pace in more than three years in May, keeping alive the possibility that the central bank will raise interest rates again before the end of 2026.

The Personal Consumption Expenditures price index rose 4.1% from a year earlier, up from 3.8% in April and marking the highest level since April 2023. On a month-to-month basis, the index climbed 0.4%, the same pace as the prior month. Core PCE, which strips out volatile food and energy prices, came in at 3.4% year-over-year, also slightly above April's 3.3%.

The data underscored the persistence of price pressures even as the economy has grown at a moderate clip and the labor market has remained stable. Federal Reserve Chair Kevin Warsh and his colleagues have repeatedly said they need to see sustained progress toward the central bank's 2% inflation target before considering rate cuts. The May report suggests that patience has not yet paid off.

Financial markets had been bracing for a higher reading, and the response was relatively contained. Treasury yields edged higher on the morning of the release, while stock futures fluctuated within a narrow band. Still, the figure narrows the window for monetary easing and increases the probability that the Fed could tighten policy if inflation does not begin to moderate in the coming months.

Consumer spending, meanwhile, remained resilient. Real personal consumption expenditures rose 0.3% in May, indicating that households continued to spend even as borrowing costs sit at their highest levels in years. That combination—sticky inflation alongside durable growth—has created a policy dilemma that Warsh has described as requiring careful and data-dependent judgment.

Economists noted that the uptick in inflation was driven in part by firmer prices for services and housing, categories that tend to respond slowly to interest-rate changes. Goods inflation, by contrast, has remained relatively benign, helped by easing supply-chain bottlenecks and softer commodity prices. Until services inflation shows a convincing decline, the Fed is unlikely to signal a pivot toward lower rates.

Image source: v3b.fal.media