New federal data released Thursday reveals inflation hitting its highest annual level in three years, intensifying political and economic challenges for President Trump and the Federal Reserve. The Fed's preferred measure, the Personal Consumption Expenditures (PCE) index, climbed 4.1% year-over-year and 0.7% in May alone. While a significant portion of the spike stems from soaring energy prices tied to the conflict in Iran, economists warn that the breadth of the increases signals deeper trouble.
War in Iran Drives Energy Costs
The PCE report lays bare the economic toll of the Iran war, particularly the closure of the Strait of Hormuz, which has disrupted global oil supplies. American households spent $552.8 billion on gasoline and other energy products in May, up sharply from $422.3 billion in February and $401.6 billion a year earlier. Gas and energy prices rose 6.5% in May, following a 5.5% jump in April and a staggering 20.9% surge in March, the war's first full month.
“Inflation is at a 3-year high due to the war in Iran and it’s painful for middle-class and moderate-income Americans,” said Heather Long, chief economist at Navy Federal Credit Union, in an analysis.
Trump’s Affordability Challenge Deepens
Trump has expressed optimism that inflation would ease quickly after last week's deal with Iran, which has already boosted oil traffic through the Strait of Hormuz. Crude prices have fallen sharply, and gasoline prices are beginning to dip in June. But Long cautioned that May's data reveals persistent affordability issues that won't vanish overnight.
Even stripping out volatile food and energy costs, so-called core inflation stood at 3.4% annually and 0.3% for the month—well above the Fed's 2% target. “Inflation’s surge is more than an oil price story. Housing, medical care and electricity are also putting pressure on family budgets and overall inflation,” Long noted.
Trump was already facing voter backlash over inflation before launching the Iran conflict. The president and his party have struggled to convince the public they can control prices, a key promise of the 2024 campaign. The political fallout deepened this week when Trump abruptly canceled a signing ceremony for a bipartisan housing bill that had passed the House. He argued that only lower interest rates can unlock the housing market, saying, “It’s all about the interest rate. Lower the interest rate.”
Fed Under Pressure to Hold Steady
With inflation still running hot, the Fed is unlikely to cut interest rates soon. The rate-setting committee voted unanimously last week to keep rates unchanged as inflation persisted and the labor market showed signs of improvement. Stronger economic activity and higher inflation make stimulus through rate cuts improbable. If core inflation remains elevated into September or if labor shortages push down unemployment, a rate hike could become necessary, warned Bill Adams, chief U.S. economist at Fifth Third Commercial Bank.
“The big near-term upside risks to inflation are from the AI boom putting upward pressure on electronics and energy prices, and from labor-intensive services provided by industries with high proportions of foreign-born workers,” Adams added.
Global Uncertainty Clouds Outlook
A lasting resolution to the Iran war could help lower gasoline prices and ease inflation, but the U.S.-Iran pact remains fragile. Israeli military pressure on Lebanon and renewed threats from Iran's Islamic Revolutionary Guard Corps—which warned tankers must use Iranian-controlled routes or face attack—keep risks elevated. The U.N. International Maritime Organization launched an operation this week to evacuate over 11,000 seafarers from the strait, while crossings rose to 70 on Thursday, according to data firm Kpler.
Economy Holds Up Despite Price Hikes
Despite the inflation surge, the U.S. economy has shown resilience. Consumer spending rose 0.3% in May after adjusting for inflation, and weekly unemployment claims fell. Households have dipped into savings or stock-market gains to maintain spending, but the personal saving rate has dropped to 3% from 4.6% in 2025. “Rising financial wealth continues to be a tailwind to spending from high-income households,” said Michael Pearce, chief U.S. economist at Oxford Economics.
For a deeper look at how the Iran conflict is hitting Americans' wallets, see our report on Gallup's finding that 67% of Americans are financially affected by surging gas prices. Meanwhile, the political landscape remains volatile as Trump's approval ratings face headwinds from inflation and ongoing legal battles, including a federal judge blocking his attempt to create a national voter database.
