US Inflation Hit 3-Year-High In May, Reveals Federal Reserve’s Preferred Gauge

Inflation in the United States rose to its highest level since 2023, the personal consumption expenditures (PCE) index revealed.

Seen as the Federal Reserve's inflation gauge, the PCE index rose 4.1% in the month of May from a year earlier. This is the highest level since April 2023, as per Bloomberg.

Core PCE prices, which exclude food and energy, rose 3.4% from a year ago, the highest since October 2023.

Inflation-adjusted consumer spending increased 0.3% compared to a month earlier.

On a monthly basis, PCE rose 0.4%. The monthly reading was 0.1 percentage point below the Dow Jones consensus estimate, as per CNBC. The annual level was in line with the estimates.

Personal consumption expenditures, seen as a proxy for spending, increased 0.7% for the month of May. This was 0.1 percentage point above the forecast. Personal income also rose 0.7%, well above the predictions of a 0.4% increase. The personal savings rate increased to 3%.

“The increase in current-dollar personal income in May primarily reflected increases in farm proprietors' income and compensation. The $156.1 billion increase in current-dollar PCE in May reflected increases of $94.3 billion in spending on services and $61.8 billion in spending on goods,” the Bureau of Economic Analysis stated.

Despite an increase in prices, US consumer spending accelerated in May, highlighting that Americans are powering through the effects of the US-Iran war.

Federal Reserve officials consider both headline and core PCE inflation rates. However, they generally look at core rate as a better measure of long-run trends, especially in light of this year's inflation surge that was driven largely by a jump in energy prices due to the US-Iran war that have slowly been impacting other parts of the economy.

The PCE index report comes just a few days after the Federal Reserve delivered what markets viewed as a tough talk on inflation and interest rates.

The new Federal Reserve Chair, Kevin Warsh, stressed the importance of price stability. The Federal Open Market Committee highlighted in its post-meeting statement that it would “deliver price stability” after missing the central bank's 2% inflation target for five successive years.

Officials also indicated a likelihood of a rate hike later in the year.