US inflation accelerated further in May, surpassing 4% for the first time in three years as the conflict in the Middle East drove up energy prices, reinforcing expectations that the Federal Reserve could raise interest rates later this year.


Data released by the Commerce Department's Bureau of Economic Analysis showed that the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation measure, rose 4.1% year-on-year in May, up from 3.8% in April. The increase marked the highest reading since April 2023 and matched economists' forecasts. On a monthly basis, the index advanced 0.4%, unchanged from April, Reuters reports.


Core PCE inflation, which excludes volatile food and energy prices, increased 3.4% annually after rising 3.3% in April. Monthly core inflation rose 0.3% for a second consecutive month.


Economists said the surge in inflation was largely driven by higher oil and gasoline prices following disruptions linked to the US-led conflict with Iran. However, easing oil prices after Washington and Tehran reached a preliminary peace agreement have raised hopes that inflation may be near its peak.


"PCE price inflation remains too high and will keep the Fed on hold and mulling a potential rate hike at upcoming meetings," said Scott Anderson, chief US economist at BMO Capital Markets. "Services inflation was even higher than goods inflation last month and will not be easily tamed by falling energy prices."


Financial markets currently see a strong likelihood of a rate increase at the Federal Reserve's September meeting.


Despite elevated inflation, consumer spending remained resilient, rising 0.7% in May after a 0.4% increase in April, supported by larger tax refunds, stock market gains and reduced household saving.


Meanwhile, business investment also strengthened. Orders for core capital goods, a key measure of business spending, rose 1.6% in May, reflecting continued investment in artificial intelligence-related technologies.


Economists estimate second-quarter US economic growth could reach an annualized rate of as much as 3%, following a 2.1% expansion in the first quarter.


By Vafa Guliyeva