Core inflation hits 3.4% in May, highest since October 2023, Fed gauge shows

• Core PCE inflation rose 0.3% monthly and 3.4% annually, both meeting consensus estimates, while headline PCE inflation hit 4.1% annually with a 0.4% monthly increase
• Consumer spending remained strong despite high inflation, with personal consumption expenditures rising 0.7% for the month, exceeding the 0.6% forecast and outpacing the inflation rate
• Energy price increases related to the Iran war have been the primary driver of the inflation surge and are gradually spreading to other sectors of the economy

Summary: Core Inflation Accelerates to 3.4% in May, Highest Since October 2023

Key Figures:

• Core PCE (excluding food and energy): 3.4% annually, up 0.3% monthly – highest since October 2023
• Headline PCE: 4.1% annually, up 0.4% monthly – highest since April 2023
• Personal consumption expenditures: rose 0.7% monthly (above 0.6% forecast)
• Personal income: increased 0.7% monthly (well above 0.4% forecast)
• Personal saving rate: 3%

Context:

The Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred inflation gauge, showed persistent inflationary pressure in May. Both core and headline readings met or slightly exceeded Dow Jones consensus estimates. The Commerce Department report indicates inflation acceleration was largely driven by energy price increases tied to the Iran war, which are now spreading to other economic sectors.

Market Implications:

The elevated inflation data reinforces the Fed's recent hawkish stance on monetary policy under new Chairman Kevin Warsh. Despite high inflation, consumer spending remained robust, growing faster than the inflation rate and exceeding forecasts. This combination of persistent inflation and strong consumer demand suggests the Fed may maintain its tough position on interest rates.

The Fed traditionally views core inflation as a better indicator of long-term trends, making the 3.4% reading particularly significant for policy decisions. The stronger-than-expected income growth and consumer spending, coupled with elevated inflation, presents a challenging environment for the central bank as it balances economic growth against price stability concerns.

The report comes shortly after the Fed delivered what markets interpreted as aggressive messaging on inflation control.