American consumers are facing mounting financial pressures as inflation reached a three-year high in May, driven by surging gasoline prices tied to the war with Iran and supply shortages caused by the artificial intelligence boom, the Commerce Department reported Thursday.
Consumer prices rose 4.1% in May from a year earlier, the largest annual increase since April 2023, according to the Federal Reserve's preferred inflation gauge. On a monthly basis, inflation was 0.4% last month, matching April's increase and down from 0.7% in March. The increase was largely driven by more expensive gas, as well as pricier semiconductors and other computer equipment that are in high demand for the AI buildout.
Economic Growth Masks Consumer Struggles
While the U.S. economy expanded at a solid and unexpected 2.1% annual pace from January through March, the Commerce Department said in its final estimate of first-quarter growth, the benefits are not reaching ordinary households. The increase in gross domestic product marked a rebound from 0.5% growth in the last three months of 2025, when a 43-day federal government shutdown weighed on the economy, and was an upgrade from Commerce's previous first-quarter estimate of 1.6% growth.
Business investment surged, likely because of an investment boom in artificial intelligence, while consumer spending, which accounts for around 70% of U.S. economic activity, fell sharply from fourth-quarter 2025 and from Commerce's previous estimate. The report said that decline suggested consumers may be cutting back in the face of higher gasoline prices caused by the war with Iran.
Tech Boom Drives Up Costs for Families
Apple announced price increases for Macs and iPads, citing a memory chip shortage brought on by the artificial intelligence boom. The company called the demand spike an "unprecedented challenge" for the consumer electronics industry and said, "We have never seen a component price increase this much, this quickly."
The new, entry-level MacBook Neo will now cost $699, up from $599. The 512 gigabyte MacBook Air now costs $1,299, up from $1,099. The one terabyte MacBook Pro is $1,999, up from $1,699. The 128 gigabyte iPad Air is now $749, up from $599, while the 256 gigabyte iPad Pro Wifi is now $1,199, up from $999.
Housing Affordability Remains Strained
The average long-term U.S. mortgage rate edged higher this week, staying close to 6.5%, where it has been the last six weeks. The benchmark 30-year fixed-rate mortgage rose to 6.49% from 6.47% last week, Freddie Mac said Thursday. One year ago, the average rate was 6.77%. Borrowing costs on 15-year fixed-rate mortgages also rose to 5.84% from 5.81% last week; a year ago, it was 5.89%.
Labor Market Shows Resilience
Fewer Americans applied for jobless aid last week as layoffs remained low despite economic headwinds. U.S. applications for unemployment benefits in the week ending June 20 fell by 12,000 to 215,000, the Labor Department reported Thursday, fewer than the 225,000 new applications forecast by analysts surveyed by FactSet. Weekly filings for unemployment benefits are considered representative of U.S. layoffs and are close to a real-time indicator of the health of the job market.
U.S. markets rose on the final day of trading during the week after oil prices eased back to where they were before the war with Iran, but drops for AI stocks kept the market in check. The S&P 500 had its second losing week in the last 13, largely because of a retreat in the tech sector, particularly artificial-intelligence companies and related technology.
Why This Matters:
The divergence between robust business investment and declining consumer spending reveals a troubling gap in how economic growth is distributed. While corporations pour resources into artificial intelligence infrastructure, ordinary families are cutting back on essential purchases as inflation erodes their purchasing power. The war with Iran has driven up gasoline prices, placing an additional burden on working households already struggling with elevated costs. Meanwhile, the AI boom that benefits tech companies is simultaneously driving up prices for consumer electronics, making essential tools for work and education less accessible. Sustained mortgage rates near 6.5% continue to lock many Americans out of homeownership, perpetuating wealth inequality. These trends underscore the need for policy interventions that ensure economic gains reach working families, not just corporate balance sheets, and for stronger consumer protections against price shocks driven by supply chain vulnerabilities and geopolitical instability.