The Federal Reserve’s preferred inflation measure rose to a three-year high in May, driven largely by higher gas prices and still-strong underlying costs—setting up fresh political pressure on President Donald Trump and complicating expectations for Fed rate c
For the second day in a row, gas money has felt like it’s winning the argument.
In May. the Federal Reserve’s preferred inflation gauge climbed to a new three-year high. a jump tied closely to a spike in gasoline prices and a stubborn rise in underlying costs. Consumer prices rose 4.1% in May from a year earlier. the Commerce Department reported Thursday—matching a politically fraught moment as midterm elections near and prices remain top-of-mind for many Americans.
On a monthly basis, inflation rose 0.4% in May, the same as April’s increase and down from 0.7% in March. Even as gas prices have begun to ease since then, May’s data carries a clear message: costs may be settling—but they are not staying down.
The May increase was largely driven by more expensive gas. alongside higher prices for semiconductors and other computer equipment. which remain in high demand for the AI buildout. The underlying picture also worsened. Measures excluding the volatile energy and food categories showed core prices rising 3.4% in May from a year earlier. up from 3.3% in April and the largest annual increase since October 2023. Core prices rose 0.3% from April to May.
Gas prices had already been pulled upward by events tied to U.S. foreign policy. Oil and gas prices have fallen substantially since Trump agreed to a peace deal with Iran earlier this month. but the conflict still pushed gas prices to nearly $4.50 a gallon nationwide in May. As of Thursday. AAA put prices at $3.92—still more than 20% above prices from the same point last year as the driving season gets underway.
Declining gas prices may pull headline inflation down next month, but the Fed is not focused only on the headline number. Underlying inflation staying elevated is precisely what keeps rate-cut hopes fragile.
The political pressure is immediate. Inflation has been above the Federal Reserve’s 2% target for more than five years. and many Americans have grown used to the feeling that wages never quite catch up. Mark Vitner. chief economist at Piedmont Crescent Capital. put it in plain terms: “Underyling inflation is closer to 3% rather than 2%.” He said it suggests the next Fed move—whenever it comes—may be more likely a hike than a cut. Vitner added that the Fed probably won’t raise rates until next year.
For now, the Federal Reserve has kept its key rate unchanged this year, a reversal from January when it had penciled in two cuts. Some economists now forecast the central bank could lift rates instead.
The push and pull between what consumers do and what prices do is also shaping the story. Adjusted for inflation, spending rose 0.3% from April to May. Inflation-adjusted incomes rose for the first time in four months. picking up 0.3%. a shift that could support consumer spending in the months ahead.
But services—often the part of inflation that sticks—did not cooperate. Services prices rose sharply in May, lifted by more expensive restaurant meals, hotel rooms, auto repairs, and health care.
The inflation figures also land amid signs the broader economy is holding up. A separate report Thursday said the economy expanded at a 2.1% annual rate in the first three months of the year—upgraded from a previous estimate of 1.6%. Another measure showed the number of people seeking unemployment benefits fell last week, suggesting layoffs remain low.
Still, markets have felt the risk that the Fed may not be headed in the direction investors want. The new inflation data arrived after new Fed chair Kevin Warsh last week emphasized the central bank’s determination to drive inflation back to its 2% target. but gave no indication of what steps the Fed might take. Economists’ expectations for a possible rate increase this year have already shaken markets this week, hitting fast-growing sectors like tech.
There is also a growing contrast between what Congress has tried to do and what Trump has refused to sign. Thursday’s inflation report came a day after Trump declined to sign housing legislation approved by Congress. The bill was intended to spur more construction and lower home prices over time—responding directly to Americans’ concerns about affordability.
Trump, for his part, has repeatedly dismissed Democrats’ focus on affordability. After the earlier CPI report earlier this month, Trump said he “loved the inflation.” He has also dismissed Democrats’ focus on “affordability” as a “hoax.”
Those messages are landing in a country where cumulative inflation has left a mark even after the rate itself cooled. Inflation jumped to 9.1% under former President Joe Biden. Even after falling back closer to 2% in 2024. voters stayed angry about the cumulative rise in the cost of groceries. rent. and other necessities.
The measure at the center of Thursday’s story is the personal consumption expenditures price index. a less widely known gauge than the consumer price index released earlier this month. The Fed prefers the PCE index because it puts less weight on housing and better reflects how Americans change shopping behavior when prices rise—such as switching to cheaper off-brand items.
The PCE price index was last below 2.5% in April 2025, when Trump unveiled his “Liberation Day” tariffs. After that, inflation climbed steadily to 2.9% just before the Iran war.
Taken together, May’s figures are a reminder that even when gas prices fall from their peaks, the economy can still be under pressure from the costs people feel every day—at the pump, in repairs, in meals, and in the prices of the goods and services that keep the domestic economy moving.
United States politics Federal Reserve inflation PCE price index consumer prices core inflation gas prices Donald Trump midterm elections rate cuts Kevin Warsh semiconductors AI buildout housing legislation