The US Federal Reserve's preferred inflation measure hit a three-year high in May, as elevated energy prices from President Donald Trump's Iran war pose a key test to his Republican Party ahead of midterm elections.
The personal consumption expenditures (PCE) prices index jumped 4.1 percent from a year ago, the Commerce Department said Thursday, up from 3.8 percent in April.
The US-Israel war on Iran spiked global energy prices and snarled supply chains as Tehran choked off the critical Strait of Hormuz.
Washington and Tehran have signed a preliminary deal to end the conflict, but markets continue to grapple with uncertainty and experts warn it will take months for fuel prices to return to pre-war levels.
Trump has dismissed recent surging inflation data, insisting prices will come down "like a rock" once the war is over.
Economists and oil industry experts say this is unlikely, as it will take months to ramp production back up to normal levels and to resume regular traffic through the Strait.
Still, some analysts believe US inflation has peaked and that oil prices will fall in the wake of the peace negotiations.
"The good news is gas prices have come down substantially since May," said Heather Long, chief economist at Navy Federal Credit Union.
"Some relief has already come for American households and this should translate to cooler inflation readings in June and beyond."
Affordability is a key political issue in November's US midterm elections, with the Democratic Party hoping to wrest control of Congress from Trump's Republicans.
"Trump promised to lower costs on 'Day One,' but he's made clear he just doesn't care," said Democratic Senator Elizabeth Warren in response to the latest inflation data.
In positive news for the world's largest economy, however, the Commerce Department revised its first-quarter GDP growth estimates up by 0.5 percentage points to 2.1 percent on Thursday, mainly due to updated figures showing lower imports.
Information services, which includes parts of the booming AI industry, was among the biggest drivers of growth in the quarter.
"The latest GDP snapshot reveals softer final demand growth, with consumer spending increasingly supported by a drawdown in savings, greater use of credit and household wealth," said EY-Parthenon's Greg Daco.
He added that while the US economy remained resilient, "the foundation of growth has become narrow."
The revision topped market expectations, with economists polled by Dow Jones Newswires and the Wall Street Journal expecting only a 0.1-percentage point rise.
Thursday's inflation data, however, was in line with analyst's expectations, as the impact of high fuel prices began to ripple across the economy.
Core PCE inflation, which strips out volatile food and energy prices, rose by 3.4 percent year-on-year -- the highest rise since October 2023.
US consumer spending was up but KPMG chief economist Diane Swonk warned growth was "concentrated in the hands of the few."
US consumers spent $151.2 billion more on gasoline and related products in May over the same month a year ago, data showed.
The average US price of a gallon of regular gasoline was still 31 percent higher than at the start of the war, according to the AAA motor club.
Federal Reserve policymakers have flagged rising concerns about sustained inflation, which has remained above its long-term two-percent target for more than five years.
The central bank's rate-setting committee voted unanimously this month to hold interest rates steady for the fourth straight meeting.
New Fed Chairman Kevin Warsh has reaffirmed a commitment to restoring price stability -- a sign of likely interest rate hikes to cool the economy.
aha/acb
