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The Federal Reserve is expected to keep US interest rates on hold at its next policy meeting after its preferred inflation gauge rose to the highest level in three years, reinforcing expectations that borrowing costs will remain elevated for longer.

The Personal Consumption Expenditures price index climbed 4.1% in May from a year earlier, up from 3.8% in April and more than double the Fed’s 2% target. Core PCE, which excludes food and energy, also accelerated to 3.4%, while consumer spending remained firm.

The figures have intensified debate over the direction of US monetary policy, with investors reassessing earlier expectations that the central bank would begin cutting rates soon. Nigel Green, chief executive of deVere Group, said the latest inflation data had changed the tone of market expectations.

“The inflation story has changed again, and markets have been forced to change with it,” Green said. “Only a few months ago, the conversation centred on how quickly the Federal Reserve would begin cutting interest rates. Today, investors are asking a very different question: could the next move eventually be another increase?”

Inflation has been pushed higher in part by energy-price pressures linked to conflict in the Middle East, although the rise in core inflation suggests broader price pressures remain embedded across the economy.

Green said the Fed could not “declare victory over inflation” while its preferred measure remained at more than twice its target.

“Oil prices have eased since the ceasefire, which is encouraging, but inflation has momentum,” he said. “One month’s relief at the petrol pump doesn’t erase broader price pressures across the economy.”

The stronger inflation reading comes against a backdrop of resilient economic activity. Consumer spending continued to grow in May, while the labour market has remained firm, reducing pressure on policymakers to ease financial conditions.

“The labour market has refused to crack. Consumer spending remains healthy. Growth has held up far better than many predicted,” Green said. “Central banks cut rates when inflation is under control or when economic weakness demands support. Neither condition has been convincingly met.”

The shift has implications across financial markets. Higher-for-longer rates can weigh on company valuations, raise government borrowing costs, influence mortgage markets, and affect currency and investment flows.

Green warned investors not to assume a quick return to ultra-low borrowing costs, saying portfolios built around rapid rate cuts should be reviewed.

The Fed has held rates steady while monitoring whether inflation is moving sustainably back toward target. The latest data suggest policymakers may remain cautious, particularly if upcoming inflation reports show continued price pressure.