Updated on June 11.
Inflation is the rate at which the price of goods and services increases. As a result of inflation, the purchasing power (value) of money decreases over time. Inflation affects the prices of everything around us.
Current inflation readings
CPI for May
The consumer price index (CPI) increased 0.5% in May, compared with a 0.6% rise in April, according to the latest report from the U.S. Bureau of Labor Statistics. The year-over-year increase was 4.2%, up from 3.8% in April. The core CPI, excluding food and energy, was up 2.9% from a year ago, or +0.2% for the month.
Annual inflation is now at its highest level since April 2023.
Here’s what NerdWallet’s senior economist Elizabeth Renter had to say about the latest CPI figures:
Rising energy costs continue to drive up overall inflation, but consumers aren’t only feeling pain at the pump. With wage growth lagging behind price growth, household budgets are under increasing pressure. After sharp growth in April, a modest deceleration in the growth of grocery prices doesn’t translate to actual relief in May. Consumers are paying more for essentials and they can feel powerless to mitigate this pain.
Prices overall didn’t grow as rapidly in May as they have for the past few months. That initial impact of the oil price shock that we saw in March has lessened, but is likely now trickling throughout the economy. In the data, the most obvious visible impact is in airline fares, but as time goes on, we’ll see price growth across categories that depend on oil and gas, whether in transporting goods or in the fields.
More people are feeling worse off about their financial situation now than a year ago, and affordability is no doubt playing a role. Higher and higher gas and food prices impact households in a dramatic way — these are things we can’t easily cut out of our budgets, or even reduce. This is especially true in households already operating on slim margins. When you follow a strict budget, there isn’t much room for adjustments.
When the FOMC meets next week, these inflation numbers will be top of mind. Under new Fed Chair Warsh, the Committee will be sussing out whether what we’re seeing in the data represents something that will work itself out in time or whether it risks being persistent. Paired with the labor market data from last week, we know a rate cut is all but off the table.
PCE for April
The personal consumption expenditures (PCE) price index for April, released by the Bureau of Economic Analysis on May 28, showed that prices rose at a 3.8% annual rate in April. Core PCE (excluding food and energy) rose at a 3.3% annual rate.
PPI for May
The producer price index (PPI), which tracks prices at the wholesale level, went up 1.1% in May, matching the 1.1% increase in April, according to the most recent data from the BLS released on June 11. On an annual basis, the index rose 6.5%.
It marks the largest 12-month increase since November 2022, when PPI rose 7.4%.
Elizabeth Renter’s take on the latest PPI figures:
Prices commanded by producers in May grew at a very fast clip for the second consecutive month, largely driven by the ongoing impact of the oil price shock. But even stripping out the direct impact of wholesale energy inflation gets us at a rate of price growth not seen since the post-pandemic inflation surge in 2022.
For consumers, today’s data has little immediate impact. While wholesale inflation can make it into consumer prices, it happens on an indirect and uncertain path. Goods at the wholesale level can have transportation, packaging and distribution layers added before they reach retail shelves. And businesses at both the wholesale and retail level can act as a buffer to consumers, absorbing at least some of the price growth if they’re concerned about their customers’ ability to stomach higher and higher prices.
That said, goods inflation at the wholesale level is more likely to ultimately impact consumer wallets than services inflation. And the latest figures portend some inflationary pressures will continue to weigh on households in the months ahead.
How inflation is measured
There are three separate reports released each month by individual government sources. Each one groups together different buckets of goods and services to measure how much prices have changed. Each index is used as a proxy for inflation:
- Consumer price index (CPI)
- Personal Consumption Expenditure (PCE) price index
- Producer price index (PPI)
The CPI and the PPI are released each month by the U.S. Bureau of Labor Statistics (BLS), while the PCE is released by the Bureau of Economic Analysis (BEA). Typically, you’ll see the inflation rate reported for all items included in the reports. But it's also common to see it reported without energy or food price changes, because those categories tend to be more volatile. This version of the index is known as “core inflation.”
» MORE: Run the numbers with NerdWallet’s inflation calculator.
The CPI is the most commonly used inflation proxy so if someone says the inflation rate is 4.2% — the rate for May — they’re probably referring to the CPI.
However, the PCE — specifically the core PCE — is the preferred inflation measure used by the Federal Reserve Open Market Committee (FOMC) to make decisions on interest rates.
Why inflation measures matter
The CPI, PCE and PPI are indicators of how the U.S. economy is doing. Monetary policymakers consider a low, stable inflation rate to be the mark of a healthy economy. The Federal Reserve targets a 2% annual inflation rate because it encourages businesses and consumers to continue spending, saving, borrowing and investing.
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When prices rise sharply, it can mean that the economy is overheated, with too much demand for or too little supply of goods and services.
And of course, higher consumer prices — whether on everyday necessities like eggs or big ticket items like cars — put a strain on household budgets, especially if salaries aren’t keeping pace with inflation.
What is the CPI?
The consumer price index, or CPI, measures the change in average prices paid by consumers for a set of goods and services that represent regular expenses, like groceries or gas.
The CPI is calculated by the U.S. Bureau of Labor Statistics and is used as a proxy for inflation. Every month, the BLS releases updated CPI data, showing monthly and annual changes in average prices.
May CPI report
The CPI increased 0.5% over the one-month period from April to May, after increasing 0.6% from March to April. Over the past 12 months, the index increased 4.2%, up from a 3.8% annual rate in April.
Core CPI — a measure that excludes food and energy prices because of their volatility — rose 0.2% from April to May, and 2.9% over the past 12 months, up from 2.8% in April.
Energy prices rose 3.9% in May, after rising 3.8% in April (and 10.9% in March), driven by volatile fuel prices. Over the last 12 months, the index for energy is up 23.5%, compared with a 17.9% annual increase in April. Gasoline prices rose 7% in May and are up a staggering 40.5% over the last 12 months.
Food prices rose 0.2% in May, after a 0.5% rise in April. Food overall is up 3.1% over the last year. Food at home rose 0.1% in May, while food away from home rose 0.3%.
Shelter, which includes rent, increased at a rate of 0.3% in May, compared to 0.6% in April. See below for a look at the CPI’s key indexes.
The latest CPI report shows prices increased in May for communication, airline fares, medical care, personal care, and education. Prices went down in other areas. New vehicles, vehicle insurance, and household furniture and operations all fell.
When is the next CPI report released?
The next CPI report will be released on July 14 and show data for June 2026.
What is the PCE?
The personal consumption expenditures price index, or PCE, measures changes in consumer spending on typical goods and services. It’s used to calculate inflation (or deflation) in the U.S. economy.
Updated each month by the Bureau of Economic Analysis (BEA), the PCE tracks what kinds of goods and services consumers buy and how much they pay for them, as well as how consumers change their spending habits when prices rise or fall.
For example, if rising gas prices lead consumers to drive less and cut down on fuel spending, the PCE will reflect that change in purchase frequency.
What’s the core PCE and why does it matter so much?
Core PCE is the Federal Reserve's preferred measure of inflation. Core PCE excludes food and fuel — two categories that frequently experience price swings. Increases in both PCE and core PCE can signal an increase in inflation; decreases may signal a decline in inflation. These results could also indicate that inflation is still growing, but at a cooler pace.
The Fed’s target for inflation is 2% on an annual basis.
- PCE is at 3.8% over the past year, up from 3.5% in March.
- Core PCE rose 3.3% over the past year, up from 3.2% in March.
When is the next PCE report released?
The PCE is released monthly in the BEA’s Personal Income and Outlays report. The next release, covering May, is scheduled for June 25.
What is the PPI?
The PPI tracks the prices that producers and manufacturers receive for their goods from retailers and distributors. The PPI rises when producers and manufacturers charge higher prices for their products, likely to offset the rising costs of raw material or distribution.
In this way, PPI functions as another measure of inflation, similar to the consumer price index and personal consumption expenditures price index, which track the prices consumers pay for goods and services. But unlike those two indexes, the PPI shows how prices are changing for retailers who are buying at the wholesale level.
“In general, the PPI is about the price change from the perspective of the seller,” says Thomas McDonald, a senior economist at the BLS. That makes the PPI a leading indicator of inflation since higher prices on the producers’ end often lead to increased prices for consumers.
May PPI report
The index rose 1.1% in May. Compared to a year ago, the index increased 6.5%.
Here are highlights from the latest PPI report:
- Core PPI, which excludes food, energy and trade services, increased by 0.8% in May — the highest month-over-month growth since March 2022 (+0.9%). It rose 5.1% compared to a year ago — the highest 12-month increase since October 2022 (+5.5%).
- Final demand goods prices rose 2.8% in May, the largest single-month increase since December 2009 (when this data were first calculated). Much of that can be attributed to a 10.7% monthly rise in the prices for final demand energy (i.e., fuel).
- Final demand services prices rose 0.3% in May, slowing a bit since the 0.7% increase in April.
When is the next PPI report released?
The BLS releases a monthly PPI report showing how the index changed. The PPI report for June will be released on July 15.
Why inflation matters
The effects of inflation are felt throughout an economy. As prices rise, what you can buy now will lessen over time. Being able to combat, or at least keep up with, inflation and sustain the purchasing power of your money is one of the main reasons to invest your money.
Consumers care about inflation because it affects costs and their standard of living. Businesses carefully watch the price of raw materials that go into their products, as well as what wages they need to pay their employees. Inflation affects taxes, government spending and programs, the level of interest rates and more.
A low, steady or predictable level of inflation is considered positive for an economy. It signals growth and healthy demand for goods and services.
As businesses generate more goods and services to keep up with demand, they need to hire more workers, which generally leads to higher employment and wage growth. Those workers then purchase things they need and want, and the cycle continues. However, when inflation gets too high or too low, it becomes dangerous because it’s hard to keep supply and demand, along with economic growth, in check.
This brings us to the importance of investing. Although you’ll earn interest from the bank on money in your savings account, the interest rate you receive usually won't match or even come close to beating the inflation rate. That’s why it can make sense to invest your money if you can afford to and grow that money’s value over time. That way, you can buy the same amount of goods and services in the future.
When creating a plan to reach your financial goals, it’s important to bake in a realistic inflation rate for future expenses so you’re saving enough to meet your needs. A financial advisor can help you do that.
How to protect against inflation
Avoid hoarding cash
To make sure your money doesn’t lose too much value, it’s important to invest and not keep too much money in cash. Inflation means your money will probably buy less over time, so consider investing the money you don’t intend to use in the next three to five years so that you can avoid a decrease in purchasing power. For your short-term savings, high-yield savings accounts may help offset inflation. See our rate tracker that compares high-yield savings rates to inflation.
» MORE: How to invest $100,000
Diversify your portfolio
Another way to prepare for inflation is by having a well-diversified investment portfolio. Diversification, when you spread your investments across asset classes (stocks, bonds, cash, real estate, etc.), various industries and countries, helps enhance investment returns while simultaneously reducing risk, such as from inflation.
Certain investments are more inflation-tolerant than others or rise with inflation. Some of these natural inflation hedges include:
- Real assets. Assets such as gold, silver or real estate, which may retain value or provide pricing power, may help withstand inflation. For example, landlords sometimes raise rents as inflation rises.
- Stocks. Especially stocks with proven earnings growth and low debt. Interest rates tend to rise with inflation, causing companies with high debt to face higher payments.
- Treasury Inflation-Protected securities. During inflationary times, rising interest rates negatively impact traditional bonds because bond prices and interest rates have an inverse relationship. TIPs are a type of bond indexed directly to CPI meant to help investors preserve purchasing power; I bonds are another option tied to inflation.
Have a strategy
Making sure your investments are set up to safeguard against inflation is important, and there are many factors to consider. Seeking a second opinion from a financial advisor can be useful to ensure that you’re on the right track and have prepared your portfolio to weather all seasons of varying economic environments.
NerdWallet writer Taryn Phaneuf and former NerdWallet writers Tiffany Lam-Balfour and Alieza Durana contributed to this article.
