Fed's favored inflation measure reaches highest level since 2023

The first inflation report released since Kevin Warsh was sworn in as chair of the Federal Reserve confirmed what most Americans already know: Costs are still going up, and the central bank's largest challenge may be rising prices.

The Fed’s favored inflation indicator, the personal consumption expenditures price index, rose 3.8% year-over-year in April, the Commerce Department said May 28. That reading is nearly in line with forecasters’ expectations and represents the highest annual increase since May 2023.

It’s up from 3.5% in March, and from 2.9% in February, before the start of the Iran war, which has resulted in supply chain disruptions that have driven up the cost of some goods and sent prices at the gas pump soaring.

The department estimated “core” PCE, which excludes volatile food and energy prices, rose 3.3% year-over-year in April – still well above the Fed’s 2% target.

Why does this inflation marker matter for the Fed?

The Fed typically raises its benchmark interest rate to help curb inflation by making borrowing more expensive and lowers it to stimulate economic growth and hiring. Concerns about stagnation in the job market prompted policymakers to cut rates three times last year, but they have remained on the sidelines so far in 2026.

As a nominee, Warsh appeared to support lowering borrowing costs, but the former Fed governor has rejoined the central bank at a time when the U.S. job market is experiencing growth. The Labor Department estimates employers added 115,000 jobs in April and an upwardly-revised 185,000 in March. While much of those gains are concentrated in a few select sectors like health care, those two reports prompted some cautious optimism about hiring picking back up in 2026.

At the same time, the Commerce Department also on May 28 revised down its initial estimate for economic growth in the first quarter of 2026. It estimates U.S. gross domestic product increased 1.6% over the year last quarter – a rate 0.4% lower than its advance estimate last month.

“We are far from stagflation, but rising inflation coupled with slowing growth is the opposite of what we want in both dimensions,” Chris Zaccarelli, chief investment officer for Northlight Asset Management said in a note to USA TODAY.

Forecasters expect policymakers will hold the benchmark rate steady at a range of 3.5% to 3.75% at their next meeting in mid-June, but have also begun to price in the possibility of a rate hike later this year or in early 2027.

“The hotter inflation report is not a surprise,” Scott Helfstein, head of investment strategy at Global X ETFs, said in another note to USA TODAY. “The market has already shifted expectations on interest rates 180 degrees this year from cuts to hikes. So, this inflation report should be baked into asset prices. This is good news. Investors can focus on fundamentals and the real economy rather than trying to game Fed moves.”

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