The formation of palladium subsurface oxygen, i.e., Pd(111) saturated with oxygen below the surface, has been demonstrated. This compound is much more stable than palladium surface oxide or bulk palladium oxide, which easily reacts with CO at elevated temperatures. The catalytic activity of an atomically clean Pd(111) surface and of Pd(111) affected by subsurface oxygen (coverage Θ = 0.00–0.46 ML) was studied during the CO oxidation reaction. The measurements were performed for a temperature range of 353–523 K, partial pressures of reactants in the range of 10–7–10–5 mbar, and different subsurface oxygen content. A distinct, previously not observed feature in the dependency of the reaction rate vs temperature was found. Furthermore, it was found that subsurface oxygen reduces the catalytic activity of the Pd(111) surface significantly, which is attributed to reduction of the sticking coefficient of CO and oxygen. In the temperature range applied for investigation of catalytic CO oxidation, the rate of the formation of subsurface oxygen is negligible. However, the formation of this phase starts to be pronounced above ∼600 K. The presence of subsurface oxygen was confirmed by the KLL Auger transition excited by monochromatic X-ray radiation, not by electron beam. It was observed that the classical Auger measurement with an electron beam destroys the subsurface oxygen compound. The combination of the CO titration with Auger peak intensity measurements allows the quantitative analysis of the subsurface oxygen. The problem of subsurface oxygen detection and its impact on the adsorption of CO and oxygen on Pd(111) are discussed. It was suggested that subsurface oxygen and surface oxide can be manufactured simultaneously. Then the obtained activity in the CO oxidation reaction will be a result of two competitive effects, i.e., promoting from surface oxide and inhibiting from subsurface oxide. This might be a source of the discrepancy in results on the influence of surface oxide on the CO oxidation reaction measured by different researchers.