US May PCE Rises 4.1%, Intensifying Inflation Pressure

Core Measure Excluding Food and Energy Rises 3.4%

First-Quarter Growth Revised Up to 2.1%

Inflation pressures tied to the war in the Middle East are spreading across the US economy, from goods to services. With the possibility of a Federal Reserve rate increase this year back in focus, the trajectory of core prices excluding food and energy is set to shape both the number and size of any hikes.

The Commerce Department said on June 25 that the personal consumption expenditures price index rose 4.1% in May from a year earlier on a seasonally adjusted basis. That was the highest reading since April 2023, when it rose 4.4%. The index also climbed 0.4% from a month earlier, a faster pace than in the prior month. The annual increase matched economists’ estimates compiled by Dow Jones, while the monthly gain was 0.1 percentage point below expectations.

The core PCE price index, which strips out food and energy, rose 3.4% from a year earlier. That was the highest since October 2023, when it increased 3.5%. After rising 3.2% in March, the gauge accelerated for a third straight month, underscoring persistent price pressures. It rose 0.3% from a month earlier.

PCE is a key economic indicator that tracks how much US households spend on goods and services. Core PCE, in particular, has a substantial influence on Fed rate decisions. Its importance has grown as higher energy prices linked to the US-Iran war ripple through the broader economy.

The latest PCE data came about a week after the Federal Open Market Committee left its benchmark rate unchanged at 3.50% to 3.75% on June 17. Fed Chair Kevin Warsh said in a statement after the meeting that the central bank would achieve price stability, signaling that a rate increase this year remains possible.

Markets are betting on further Fed tightening. MarketWatch reported that pricing in 30-day federal funds futures on the Chicago Mercantile Exchange reflects expectations for about 1.5 rate increases by year-end. That suggests the benchmark rate could reach 4% by December. Bank of America said in a report released on June 22 that it expects the Fed to raise rates by 0.25 percentage point each in September, October and December.

Other data released the same day pointed to a relatively resilient US economy. Gross domestic product expanded at a seasonally adjusted annual rate of 2.1% in the first quarter, above the previous estimate of 1.6% and the market forecast of 1.7%. Initial jobless claims for the week of June 14 to June 20 totaled 215,000, below the market estimate of 223,000.

Son Ju-hyung, Hankyung.com reporter handbro@hankyung.com