The US Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index, climbed to 4.1% year-on-year in May, marking its highest level in three years.
The surge was primarily driven by elevated energy costs stemming from the ongoing US-Israel conflict with Iran, which has disrupted global supply chains and choked off critical shipping routes through the Strait of Hormuz.
This broadening of inflationary pressures beyond just energy suggests that the geopolitical shock is permeating the wider economy, complicating the Federal Reserve’s mandate to return inflation to its 2% target.
Underlying price pressures also accelerated, with the core PCE index rising to an annual rate of 3.4%, its highest reading since October 2023.
This broadening of inflationary pressures beyond just energy suggests that the geopolitical shock is permeating the wider economy, complicating the Federal Reserve’s mandate to return inflation to its 2% target.
The data presents a significant challenge to policymakers, who had been navigating a delicate balance between supporting economic growth and curbing price rises.
The war-induced energy spike has effectively reset the inflation baseline, forcing markets to reassess the likelihood of near-term interest rate cuts.