The US core personal consumption expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, rose 2.6% in May from a year earlier, the highest level in three years, according to data released Friday by the Bureau of Economic Analysis. The increase exceeded economists' expectations of 2.5% and marked a significant acceleration from April's 2.4% annual gain.
Monthly and core trends
On a monthly basis, the core PCE index, which excludes volatile food and energy prices, increased 0.3% in May, matching the previous month's pace. The overall PCE price index, which includes food and energy, rose 2.8% year-on-year in May, up from 2.7% in April, and 0.3% month-on-month.
“The May data confirms that inflation is proving stickier than anticipated,” said Sarah Johnson, chief economist at EconForecast Advisors. “The Fed's progress on taming price pressures has stalled, complicating the outlook for interest rate cuts.”
Impact on Federal Reserve policy
The hotter-than-expected inflation reading reduces the likelihood of the Federal Reserve cutting interest rates at its next meeting in July. Fed officials have emphasized they need to see sustained evidence that inflation is moving sustainably toward their 2% target before easing policy. The core PCE index has now been above 2% for over three years.
Following the data release, market expectations for a rate cut in September fell to about 40%, down from 55% earlier in the week. The yield on the benchmark 10-year Treasury note rose to 4.35%, reflecting diminished expectations for monetary easing.
Consumer spending and income
Despite rising prices, consumer spending remained resilient in May. Personal consumption expenditures rose 0.4% month-on-month, slightly above the 0.3% forecast. Personal income increased 0.5%, outpacing the 0.4% gain in April, driven by solid wage growth in a tight labor market.
“Consumers continue to spend, but the persistent inflation is eroding purchasing power,” noted Mark Thompson, senior economist at Global Insight. “The saving rate dipped to 3.2% from 3.4%, suggesting households are drawing on savings to maintain spending levels.”
Broader economic context
The inflation data comes amid a mixed economic picture. The labor market remains robust, with the unemployment rate at 3.6% and job growth averaging over 200,000 per month in recent months. However, manufacturing activity has softened, and consumer confidence has declined slightly as inflation concerns persist.
The Fed's next policy meeting is scheduled for July 28-29. Investors will closely watch upcoming inflation and employment data for clues on the central bank's next move. Some analysts argue that the Fed may need to raise rates further if inflation does not show sustained improvement.
