US inflation accelerates to 3.4% as consumer spending jumps 0.3%

Consumer spending rose as the Fed's preferred inflation gauge accelerated to its highest since late 2023, complicating the policy path.

Core PCE inflation accelerated to 3.4% in May, the highest since October 2023, as real consumer spending rose 0.3% from the prior month, Bureau of Economic Analysis data showed Thursday.

"The combination of sticky inflation and resilient consumption reduces the case for near-term rate cuts," said Sarah Miller, chief U.S. economist at MacroPolicy Research. "The Fed's 2% target remains distant."

Headline PCE, which includes food and energy, climbed to 4.1% from 3.8% in April, matching economist projections. Core PCE exceeded the 3.3% consensus estimate and remained well above the central bank's 2% target. On a monthly basis, core prices rose 0.3% from April.

The data strengthens the case for the Federal Reserve to hold rates steady at its July meeting, with markets pricing a less than 20% probability of a cut, according to CME FedWatch data. If inflation persists at these levels through the third quarter, the central bank may need to consider whether its current restrictive stance is sufficient.

The May reading marks the second consecutive acceleration in core PCE after it held at 3.3% in April. The last time core inflation ran this hot was in October 2023, when it reached 3.5% — a level that preceded the Fed's final rate hike of the current cycle in July 2023. Since then, the central bank has held the fed funds rate at 5.25% to 5.5%, the highest in more than two decades.

Inflation-adjusted consumer spending rose 0.3% month over month, signaling that households continue to draw on savings and credit to maintain consumption levels despite elevated prices. The personal saving rate edged down to 3.8% from 4.1% in April, suggesting consumers are depleting pandemic-era buffers to sustain spending.

The cross-asset reaction reflected the hawkish implications. The two-year Treasury yield climbed 8 basis points to 4.72% as traders pared bets on rate cuts, while the S&P 500 fell 0.6% in afternoon trading. The Bloomberg Dollar Index gained 0.3%, extending its monthly advance as rate differentials widened in favor of the U.S.

The trajectory of inflation over the next two months will be critical for the Fed's September meeting, where policymakers will have updated quarterly economic projections. If core PCE remains above 3% through August, the median dot may shift to signal only one cut in 2026, down from the two projected in March.

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