US inflation highest in 3 years

On June 25, the US Department of Commerce announced that the Personal Expenditure Index (PCE) in May increased by 4.1% compared to last year – the highest since April 2023. Excluding energy and food prices, core PCE increased by 3.4% – the highest since October 2023.

These figures all match analysts’ forecasts. PCE is the preferred inflation measure of the US Federal Reserve (Fed). The Fed often considers core PCE as a measure of long-term trends, especially since this year’s inflation is mainly influenced by energy prices due to the Middle East conflict.

Although oil and gasoline prices in the US have dropped in the past few weeks, thanks to the ceasefire agreement between the US and Iran, economists believe that inflation will continue to accelerate for a while longer. Last weekend, US President Donald Trump and Masoud Pezeshkian signed a preliminary peace agreement to reopen maritime routes blocked by fighting.

Before the war, prices in the US had also increased because of the Trump administration’s import tax policy. Rising costs of living are becoming a barrier for President Donald Trump and the Republican Party, as the party seeks to retain control of Congress in the November midterm elections. Mr. Trump won the 2024 presidential election partly thanks to his pledge to cool inflation.

The Fed sets an inflation target of 2%. Last week, this agency kept the reference interest rate unchanged at 3.5-3.75%. However, the quarterly economic forecast shows that officials plan to raise interest rates this year to curb inflation.

Despite high inflation, US consumers have maintained their spending this year, thanks to larger tax refunds and rising stock market momentum. Households are also withdrawing their savings and saving less.

Consumption – contributing more than two-thirds of US GDP – increased 0.7% in May, after increasing 0.4% the previous month. Consumption is forecast to continue to accelerate this quarter.