US consumer spending accelerated in May despite inflation reaching its highest level in over three years, according to Bureau of Economic Analysis data released Thursday. The personal consumption expenditures price index rose 4.1% last month from a year earlier, marking the most significant inflation increase since April 2023. The headline PCE price index climbed 0.4% over the month after rising by the same margin in April. Excluding food and energy, prices were up 3.4% from a year earlier, demonstrating that inflationary pressures are broad-based across the economy. As per The Times of India, the Federal Reserve's preferred measure of inflation reached its highest level in three years in May, largely driven by rising petrol prices. The inflation data shows services inflation excluding energy and housing advanced 0.5%, the most since January, with financial services prices rising by the most in almost a year, while transportation services and healthcare also posted strong increases. The U.S.-led geopolitical conflict with Iran has pushed up core crude oil prices, which further passed through to refined products, driving up retail gasoline prices. Although crude and gasoline prices have experienced temporary pullbacks in recent weeks following a fragile ceasefire agreement, economists generally believe that inflation remains highly sticky and will persist at elevated levels for an extended period.
The latest data reveals that core PCE inflation rose to 3.4% in May, up from 3.3% in April and marking the highest core PCE reading since late 2023. This core inflation measure, which excludes food and energy, gives economists and policymakers a clearer view of underlying price trends beyond volatile items like gasoline. The Associated Press reports that higher gas prices were one of the main drivers after the conflict involving Iran pushed national gasoline prices close to $4.50 a gallon before easing. Additionally, higher costs for semiconductors and computer equipment used in artificial intelligence infrastructure contributed to the inflationary pressure. The report was closely watched because PCE is the inflation measure the Federal Reserve follows most closely when setting interest-rate policy, making it harder for the Fed to dismiss the May spike as only an energy story. Energy played a large role in the May jump, with fuel costs hitting consumers directly, while technology hardware can feed into company costs and future pricing. Another worrisome sign is the hotter trend in PCE services prices excluding energy and housing, which also extended its recent acceleration, rising 3.9%, giving the Fed less room to argue that it can remain patient in deciding whether a hawkish pivot in monetary policy is necessary.
Despite the challenging inflation environment, inflation-adjusted consumer spending rose 0.3% in May after stalling in April, as reported by The Economic Times. This resilience is particularly noteworthy given that Americans are powering through the fallout from the Iran war, which has created additional economic pressures. The spending growth suggests consumers are adapting to higher prices through various strategies, including seeking more deals and putting off major purchases. Consumer spending, which accounts for more than two-thirds of economic activity, was bolstered by higher-than-usual tax refunds this year as well as a stock market rally, which have cushioned some of the pain at the pump. Companies like Kroger Co. report that consumers are seeking more deals as higher gas prices squeeze household budgets, while Lowe's Cos. says customers are putting off big-ticket purchases, with CEO Marvin Ellison noting "This is a healthy consumer, but the broader macro is giving them a bit of hesitation." However, The Times of India reports that consumer spending, which accounts for around 70% of US economic activity, declined sharply from both the previous quarter and the Commerce Department's earlier estimate, suggesting households may be cutting back as higher petrol prices resulting from the war with Iran add to living costs.
The growing demand for AI-related chips has started affecting retail prices, with Apple announcing significant price increases across several Mac and iPad models. The company described the situation as an "unprecedented challenge" for the consumer electronics industry, stating "We have never seen a component price increase this much, this quickly." The entry-level MacBook Neo now costs $699, compared with $599 earlier, while the 512 gigabyte MacBook Air has increased from $1,099 to $1,299. The one terabyte MacBook Pro now sells for $1,999 instead of $1,699. Among tablets, the 128 gigabyte iPad Air now costs $749, up from $599, while the 256 gigabyte iPad Pro Wifi has risen from $999 to $1,199. The increasing costs of semiconductors and other computer equipment, which remain in strong demand for artificial intelligence infrastructure, also contributed to the overall inflationary pressure.
Despite higher inflation, the US economy expanded at an annual pace of 2.1% during the January-March quarter, according to the Commerce Department's final estimate released on Thursday. The latest figure marked a recovery from the 0.5% growth recorded during the final three months of 2025, when a 43-day federal government shutdown weighed on economic activity. It was also higher than the department's earlier estimate of 1.6% growth for the quarter. Business investment recorded a sharp increase, likely reflecting stronger investment linked to artificial intelligence. However, The Times of India reports that consumer spending, which accounts for around 70% of US economic activity, declined sharply from both the previous quarter and the Commerce Department's earlier estimate, suggesting households may be cutting back as higher petrol prices resulting from the war with Iran add to living costs. The May report showed higher income, higher spending and higher prices at the same time, with the personal saving rate at 3.0% in May, showing households had limited room to absorb another round of price increases without pulling back elsewhere.
Borrowing costs for homebuyers also increased slightly during the week, with Freddie Mac reporting that the average rate on a 30-year fixed mortgage rose to 6.49%, up from 6.47% a week earlier. The rate has remained close to 6.5% over the past six weeks, though it remains below the 6.77% average recorded during the same period last year. The average rate on a 15-year fixed mortgage also increased to 5.84% from 5.81% a week earlier, with a year ago average at 5.89%. Higher mortgage rates can increase monthly repayments by hundreds of dollars, reducing the purchasing power of borrowers. The labor market remains resilient, with applications for unemployment benefits falling by 12,000 to 215,000 in the week ending June 20, according to the Labour Department. The figure came in below the 225,000 applications expected by analysts surveyed by FactSet, with weekly jobless claims widely regarded as a near real-time measure of layoffs and the health of the US jobs market.
