The war with Iran didn’t just push up energy prices. It made the whole U.S. inflation problem worse.
The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures price index, rose 0.4 percent in May, the Bureau of Economic Analysis said Thursday. Prices were up 4.1 percent from a year earlier, the fastest annual inflation in more than three years.
The recent jump in inflation has been driven by high oil prices, which have receded since the U.S. and Iran reached a deal to end their war, at least for now, and to reopen the Strait of Hormuz. Many forecasters believe that May could turn out to be the peak for inflation for the year.
But the data on Thursday showed that the inflation problem goes beyond energy. The so-called core measure, which excludes volatile food and energy prices, rose 0.3 percent in May and was up 3.4 percent from a year earlier — a sign that the pickup in inflation isn’t limited to the categories directly affected by the war.
The pickup in prices poses a challenge for the Fed and its new chairman, Kevin M. Warsh, who is under pressure from President Trump to lower interest rates. At their meeting this month, about half of Fed officials indicated that they instead expected to raise rates by the end of the year, and investors have become increasingly convinced the central bank will have to move to rein in inflation.
“This is not a comfortable report for Fed officials,” Omair Sharif, founder of Inflation Insights, a forecasting firm, wrote in a note to clients on Thursday.
At the same time, the data released Thursday showed that consumers remain resilient in the face of high prices. Consumer spending rose 0.7 percent in May, easily outpacing the increase in prices. Personal income also rose 0.7 percent, suggesting the strong labor market is helping households keep up with higher prices.
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