Key inflation gauge jumps to 3-year high in latest sign of affordability challenges

A key Federal Reserve inflation gauge rose to a three-year high in May, adding to signs that affordability challenges are persisting. The Commerce Department reported that consumer prices increased 4.1% year over year in May, the largest annual rise since April 2023, while the monthly gain was 0.4%, matching April and down from 0.7% in March. The report attributes much of the increase to higher gas prices and also cites more expensive semiconductors and computer equipment linked to AI demand. Core prices excluding energy and food rose 3.4% annually in May, and services costs climbed, including restaurant meals, hotel rooms, auto repairs, and health care. Even as oil and gas prices later fell from the May peak, underlying inflation remained elevated. The Fed kept its key rate unchanged this year, reversing expectations it had set for cuts in January, as some economists warn the next move could be a hike. A separate report also showed the economy grew at a 2.1% annual rate in the first three months, and fewer people sought unemployment benefits.