Here’s the update I didn’t want to bury this week: on Thursday we got the inflation report the Federal Reserve, the central bank that steers the country’s interest rates, watches most closely, and it hit its highest level in three years. The plot twist is that this isn’t really a gas story anymore. Let me walk you through what shifted and what it means for your checking account.
The report is called the PCE index, short for personal consumption expenditures, which is a fancy way of saying it measures how much prices are changing across pretty much everything people buy. The Fed leans on it more than the inflation figure you usually see in the news. In May, the headline reading came in at a 4.1% annual rate, the highest since April 2023.
But the number economists really squint at is “core” inflation, which leaves out food and gas on purpose because those two bounce around wildly from month to month. Core landed at 3.4%, its highest since October 2023. When you pull gas out of the math and prices are still climbing, that tells you something.
A couple of weeks ago, I told you a big slice of this year’s inflation was really an energy story, set off by the war in Iran pushing oil and gas prices higher. That was true. It’s just no longer the whole picture.
Core inflation deliberately ignores gas. So when it rises to 3.4%, that’s a sign higher energy costs are quietly working their way into everything else: the cost of trucking goods to the store, keeping the lights on in that store, heating a building. In May alone, prices for financial services and insurance jumped 1.2% in a single month, and housing costs nudged up 0.3%. When pricier oil starts showing up on your insurance bill, the pressure has officially spread.
Now, the report had genuinely encouraging lines in it too. People kept spending, and incomes rose 0.7% in May. That’s real, and it’s good. But here’s the context that matters. The personal savings rate, which is simply the share of income people hang onto instead of spending, has been stuck painfully low at around 3%. For perspective, back in 2020 it briefly topped 31%.
The gap is increasingly covered by credit cards. Card balances reached $1.25 trillion earlier this year, close to a record and up about 6% from a year ago. The way Gregory Daco, chief economist at EY-Parthenon, put it: “Consumers are increasingly facing an income squeeze, which is forcing them to use savings, credit and wealth to sustain their spending patterns.” No surprise that a recent New York Fed survey found household worries about money at their highest level since 2022.
To put a real number on it, Moody’s estimates the average household has already spent about $450 extra on energy since the war began in late February. If prices hold where they are, that tab could climb toward $2,000 over a full year.
If you’ve been waiting for the Fed to cut interest rates and make your credit card balance and car loan cheaper, I’ll be straight with you: that looks unlikely for now. The Fed’s new chair, Kevin Warsh, has made pulling inflation back down his clear priority. The Fed has taken a rate cut off the table for this year, and traders now think the next move is more likely to be a hike, possibly in September.
In plain English, borrowing stays expensive for a while longer. The flip side, and there honestly is one, is that the interest you can earn on savings right now is unusually generous. High rates cut both ways.
If you texted me asking whether to panic, my answer is no. One month of data is a weather report, not the climate. But I’d gently push you toward two moves: protect the money you already have from being nibbled away by prices, and make sure none of your cash is sitting idle while banks are finally paying real interest. That’s the whole game this month, a little defense and a little quiet offense.
Prices are on the move, but so are you. Pick one line off that list, knock it out before the weekend, and you’ll be a step ahead of the headlines.
