#USMayPCEInflationRisesTo4.1%HighestIn3Years

The Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, rose to 4.1% year-over-year in May, up from 3.8% in April. That's the highest reading since April 2023 and the first time above 4% in three years.

Core PCE, which strips out volatile food and energy, came in at 3.4% annually, the highest since October 2023.

On a monthly basis:

· Headline PCE: +0.4% (slightly below the 0.5% forecast)
· Core PCE: +0.3% (in line with expectations)

What Drove the Surge

The primary culprit was energy prices. The U.S.-led war against Iran sent oil and gasoline prices sharply higher, with energy-related goods and services jumping 4% for the month. Food prices also edged up 0.1%.

Services inflation accelerated to 0.5% from 0.3% in April, driven by transportation services (up 0.8%) and financial services/insurance (up 1.2%), reflecting higher jet fuel costs and the stock market rally.

The Consumer Held Up

Despite higher prices, spending remained surprisingly strong. Personal consumption expenditures jumped 0.7% in May, outpacing both forecasts and the inflation rate. Consumers were helped by larger tax refunds this year and a strong stock market, which cushioned some of the pain at the pump. Personal income also rose 0.7%, and the saving rate stood at 3%.

What It Means for Rates

The Fed held rates steady at 3.50%-3.75% at their June meeting, but updated projections showed policymakers expect to raise borrowing costs this year—with September now seen as the most likely date for a first hike. New Fed Chair Kevin Warsh has made "delivering price stability" a top priority, and the FOMC's language has shifted decisively hawkish.

One Big Caveat

This data might already be stale. Since the US and Iran signed a preliminary peace deal earlier this month, oil prices have plunged back to pre-war levels. That June drop isn't reflected in the May PCE. Many economists now believe May could mark the peak for headline inflation.

But core inflation is a different story. Service prices, tariffs, and semiconductor costs aren't going to retreat as easily, and on a three-month annualized basis, core inflation is running at 4%. The fight between the hawks and doves at the Fed is far from over.