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🚨 BREAKING: Supreme Court Rules in Favor of Roundup Maker in Massive Cancer Lawsuits 🚨
The Federal Reserve’s preferred inflation gauge rose to a new three-year high in May as gas prices peaked, a sign rising costs could pose political problems for President Donald Trump and his political party as midterm elections near.
Consumer prices rose 4.1% in May from a year earlier, the Commerce Department said Thursday, the largest annual increase since April 2023. On a monthly basis, inflation was 0.4% last month, matching April’s increase and down from 0.7% in March.
The increase was largely driven by more expensive gas, as well as pricier semiconductors and other computer equipment that are in high demand for the AI buildout. Rising prices have caused the inflation-fighters at the Federal Reserve to keep their key rate unchanged this year, a reversal from January when they had penciled in two cuts. Some economists forecast the central bank could lift rates this year instead.
“Underyling inflation is closer to 3% rather than 2%,” said Mark Vitner, chief economist at Piedmont Crescent Capital. “It does suggest to me that the next Fed move, whenever it comes, is more likely to be a hike than a cut.” The Fed probably won’t raise rates until next year, he added.
Oil and gas prices have fallen substantially since Trump agreed to a peace deal with Iran earlier this month, but the conflict lifted gas prices to nearly $4.50 a gallon on average nationwide in May. They have since fallen back to $3.92 as of Thursday, according to AAA, but that’s more than 20% above prices at this time last year as the driving season gets underway.
Declining gas prices will likely pull down headline inflation next month, yet measures of underlying inflation remain stubbornly elevated and will be a concern for the Fed. Excluding the volatile energy and food categories, core prices rose 3.4% in May compared with a year earlier, up from 3.3% in April and the largest increase since October 2023. Every month, they rose 0.3% from April to May, the same as the previous month.
Higher gas prices aren’t the only thing worsening inflation. The AI buildout has made computer components more expensive, and Apple announced last week that it would raise prices for its computers and iPads because of the higher costs. Service prices also rose sharply last month, lifted by more expensive restaurant meals, hotel rooms, auto repairs, and health care.
At the same time, consumers appear willing to keep spending and boost the economy. Adjusted for inflation, spending rose 0.3% from April to May. And inflation-adjusted incomes rose for the first time in four months, picking up 0.3%, which could bolster consumer spending in the coming months.
A separate report Thursday showed that the economy expanded at a 2.1% annual rate in the first three months of the year, an upgrade from a previous estimate of 1.6%. And the number of people seeking unemployment benefits fell last week, a sign that layoffs remain low.
New Fed chair Kevin Warsh last week underscored the central bank’s determination to drive inflation back to its 2% target, but he gave no sign of what steps the Fed might take. Some economists, however, now expect the central bank to increase rates this year. Those expectations upended U.S. markets this week, hammering fast-growing sectors like tech.
Inflation has been above the Fed’s 2% target for more than five years, leaving many Americans gloomier about the future. Vitner points out that inflation hadn’t topped 2.5% for nearly a decade before the pandemic, likely making the inflation spikes since then even harder to accept for most households.
Thursday’s report covers the personal consumption expenditures price index, a lesser-known measure compared to the consumer price index, which was released earlier this month and showed a similarly large increase. The Fed prefers the PCE index because it puts less weight on housing and also reflects changes in how Americans shop when prices rise, such as when consumers buy cheaper off-brand items.
The new inflation data arrives a day after Trump refused to sign housing legislation, approved by Congress, that is intended to spur more construction and lower home prices over time, a response to Americans’ concerns about rising costs.
Trump responded to the CPI report earlier this month by saying he “loved the inflation.” He has previously dismissed Democrats’ focus on “affordability” as a “hoax.”
Inflation jumped to 9.1% under former President Joe Biden, but even as it fell back closer to 2% in 2024, voters remained angry about the cumulative rise in the cost of groceries, rent, and other necessities.
The PCE price index was last below 2.5% in April 2025, when Trump unveiled his “Liberation Day” tariffs. Inflation then climbed steadily to 2.9% just before the Iran war.
🇺🇸 U.S. Economy Bounces Back! 📈
The U.S. economy just showed some major resilience, expanding at a solid 2.1% annual pace in Q1, according to the Commerce Department's final estimate released Thursday.
This is a massive rebound from the sluggish 0.5% growth we saw at the end of 2025 (which took a heavy hit from that 43-day federal government shutdown). It’s also a nice upgrade from the previous Q1 estimate of 1.6%.
Here is the breakdown of what's driving the economy—and what's stalling it:
🚀 The Good: The AI Investment Boom
Corporate America is pouring money into artificial intelligence. Excluding housing, private investment skyrocketed by 10.6%.
Data Center Surge: Investment in information-processing equipment jumped by a massive 39.9% as tech companies scramble to build out AI infrastructure.
Jobs: The labor market remains strong, averaging 188,000 new jobs per month from March through May.
⚠️ The Bad: Consumer Pullback & Housing Drop
It’s not all sunshine. The daily squeeze on Americans is starting to show:
Gas Prices Biting: Consumer spending (which makes up 70% of economic activity) fell sharply. High gas prices fueled by the ongoing conflict with Iran are clearly weighing on wallets.
Housing Slump: High interest rates continue to bruise the real estate market. Residential investment dropped 7.8%—marking its fifth straight quarterly decline.
🔮 What’s Next?
While the AI boom and a government spending rebound (up 9.4%) carried this quarter, economists are watching the American consumer closely. Will spending tick back up in Q2, or will inflation and energy shocks keep things cool? We will get our first official look at Q2 growth on July 30.
Facebook owner Meta is reversing last month's decision to redeploy thousands of engineers to AI training roles. In an internal memo seen by Business Insider, Meta says it will "defer to each individual's choice" about whether to assist on the AI effort. The so-called "draft" had sparked serious backlash among Meta employees, just as morale across the company more generally fell to "probably one of the worst it's ever been," said CTO Andrew Bosworth in a recent interview.
Apple on Thursday raised prices on its MacBook and iPad models, citing large increases in memory and storage costs driven by the AI boom. "We know this is not welcome news, and we are working tirelessly to find solutions," the tech giant said in a statement. Last week, outgoing CEO Tim Cook said Apple could no longer shield consumers from rising expenses, which have more than quadrupled in recent months. Analysts expect the average selling price of Apple products to rise by 12% this year.
Good news for the U.S. job market, but inflation is still putting the squeeze. 📉💼
Fewer Americans applied for jobless aid last week, with unemployment applications dropping by 12,000 to 215,000. That’s coming in lower than Wall Street expected and proves that layoffs remain remarkably low despite some major economic headwinds.
Here is the quick breakdown of what’s happening with the economy right now:
📈 The Good News: Hiring is Bouncing Back
Surprising Gains: U.S. employers added a shocking 172,000 new jobs in May.
The Trend: The economy is averaging 188,000 job gains over the last three months—the best hiring streak we've seen since early 2024.
Low Unemployment: The national unemployment rate is holding steady at a historically low 4.3%.
Plenty of Openings: Job vacancies jumped to 7.6 million in April, up significantly from March.
⛽ The Catch: Inflation and Interest Rates
Gas Prices Bit Hard: Due to the recent conflict in Iran and the temporary closure of the Strait of Hormuz, inflation hit a three-year high of 4.1% in May.
Rate Hikes on the Table: Even though the war has ended and oil is flowing again, inflation is still way above the Fed’s 2% target.
What’s Next: Wall Street sees an 85% chance that the Federal Reserve will raise interest rates at least once before the end of the year to cool things down.
🔮 The Uncertainty Factor
While the job market is proving resilient, businesses are still navigating a bumpy road. Ongoing tech shifts—like massive investments in Artificial Intelligence—along with recent high-profile layoffs at companies like Amazon, Disney, Walmart, and UPS, have kept everyone on their toes.
The government releases the official June jobs report next week, which will give us an even clearer picture of where things are heading.