The Federal Reserve’s preferred inflation gauge ratcheted higher in May as energy and trade shocks from the Iran war, Trump administration tariff polices, massive AI spending and widening federal deficits continue to push consumer prices higher.

Posting 4.1% growth from a year ago in May, the personal consumption expenditures (PCE) price index jumped to its largest increase since April 2023 last month, according to the Bureau of Economic Analysis, which updated the index Thursday. Headline PCE rose 3.8% annually the previous month.

Economists polled by FactSet nailed the 4.1% rise in annual PCE inflation, matching consensus projections by economists surveyed by Reuters.

Core PCE inflation, which excludes volatile food and energy prices, increased 3.4% over the year in May, notching 0.3% growth from April. That compares to 3.2% annual growth in core PCE inflation during February and March and 3.3% growth in April.

The latest inflation reading follows a unanimous decision by U.S. central bankers last week to leave the federal funds rate unchanged at its current range of 3.5% to 3.75% amid reaccelerating inflation. Fed Chair Kevin Warsh emphasized in an ensuing press conference that the bank was recommitting itself to achieving its stated 2% inflation target.

But to do so, the Federal Reserve may have to raise its benchmark interest rate, a move Fed officials have signaled growing comfort with in a hawkish pivot since the Iran war began.

Median projections shared by Fed officials at their June policy meeting showed the fed funds rate at 3.8% by the end of 2026, implying one quarter-point increase by the end of the year. Leading U.S. banks are split on the signals that the market is sending, however.

Citi, for example, updated its interest rate forecast this week to project one 0.25% hike in the fed funds rate in 2026, while Bank of America Securities on Tuesday unveiled expectations for three quarter-point hikes over the rest of the year.

As of June 8, meanwhile, Goldman Sachs Research projected a fed funds rate of 3.1% by the end of 2027, predicting two quarter-point cuts later next year. The bank said its economists “have not yet seen signs” that inflationary pressures from the Iran war are broadening out, leaving its outlook for persistent inflation “still at a low level.”

Market-implied odds of at least a quarter-point hike occurring by the Fed’s policy meeting in mid-September stood near 60% as of Thursday morning after the PCE release, according to CME FedWatch.

Thursday’s PCE update offered some evidence that rising inflation is not only being fueled by energy and trade shocks from the Middle East conflict. Services inflation rose 0.5% in May from 0.3% growth in March and April, compared to 0.4% growth in goods prices.