US core PCE inflation hits 3.4% in May, highest since October 2023

US inflation accelerated to a three-year high in May, with the Fed's preferred gauge showing price pressures broadening beyond energy costs.

The Federal Reserve's preferred inflation gauge rose at the fastest pace in more than three years in May, with core PCE hitting 3.4% as the Iran conflict pushed energy costs higher and broadened price pressures across services. Headline PCE climbed 4.1% from a year earlier, the largest increase since April 2023 and matching the consensus estimate of economists surveyed by Bloomberg.

"The persistence of core inflation at these levels removes any remaining prospect of near-term rate cuts," said James Okafor, macro analyst at Edgen. "The Fed's 2% target is now further out of reach than at any point in the past two years, and the broadening of price pressures beyond energy suggests this isn't a one-off supply shock."

Core PCE, which excludes volatile food and energy components, rose 0.3% from April, accelerating from a 0.2% monthly gain in the prior period and matching expectations. On an annual basis, the core reading of 3.4% was revised up from a previously reported 3.3% for April, marking the third consecutive month of acceleration. The headline figure was pushed higher by a 1.2% monthly surge in energy prices, which the Bureau of Economic Analysis attributed to disruptions stemming from the Iran conflict.

The data complicates the Fed's policy path ahead of its July meeting. Interest-rate futures markets have all but priced out any chance of a cut in 2026, with the first full quarter-point reduction now not fully discounted until the second quarter of 2027, according to CME FedWatch data. The 2-year Treasury yield rose 8 basis points to 4.87% following the release, while the S&P 500 fell 0.6% as traders repriced the rate outlook. The US Dollar Index climbed 0.3% to 105.8, extending its year-to-date gain.

Consumer spending, which accounts for about two-thirds of US economic output, rose 0.4% in May from the prior month, the data showed, suggesting households continue to draw down pandemic-era savings to maintain consumption levels. Real disposable personal income edged up just 0.1%, indicating that the spending pace may be unsustainable if inflation remains elevated. The personal saving rate fell to 3.2%, the lowest since December 2022.

The last time core PCE ran above 3.4% was in October 2023, when it stood at 3.5%. In the six months following that reading, the S&P 500 gained 14% as markets anticipated the Fed would eventually pivot to easing — a scenario that now appears far less likely given the current geopolitical backdrop. The Iran conflict adds a supply-side shock that the Fed has limited tools to address through demand management alone, raising the risk of a prolonged period of above-target inflation.

This article is for informational purposes only and does not constitute investment advice.