PCE inflation breaks above 4% for first time in three years
The Commerce Department reported Thursday that the Personal Consumption Expenditures price index — the Federal Reserve's preferred inflation measure — rose 4.1% year-over-year in May, up from 3.8% in April. This marks the first reading above 4.0% since April 2023. Core PCE, which strips out volatile food and energy prices, increased 3.4% annually after a 3.3% rise in April. Consumer spending also jumped 0.7% month-over-month, indicating resilient demand.
Fed rate hike expectations rise
The inflation data reinforces the Fed's hawkish stance. The central bank left rates unchanged at 3.5%-3.75% at its June meeting, but median projections imply one quarter-point increase by year-end. Financial markets are pricing in a rate hike as early as September. Fed officials have emphasized they need to see sustained evidence of inflation returning to the 2% target before easing policy.
Oil peace deal may shift inflation trajectory
The Middle East conflict had pushed energy prices higher, contributing to the May spike. However, the preliminary US-Iran peace deal signed Thursday sent oil prices falling to pre-war levels. Analysts suggest May may represent the peak for inflation this cycle, with the Strait of Hormuz reopening expected to ease supply pressures. 'Next month's data needs to be lower,' said Chris Zaccarelli of Northlight Asset Management.