As international oil prices surged amid the recent Middle East conflict between the United States and Iran, U.S. inflation in May rose 4.1% from a year earlier.
According to the U.S. Department of Commerce on the 25th (local time), last month's personal consumption expenditures (PCE) price index rose 4.1% from the same month a year earlier. It increased 0.4% from the previous month. It is the first time since April 2023 that the PCE inflation rate has exceeded 4%.
The core PCE price index, which excludes the volatile food and energy categories, rose 3.4% year over year and 0.3% month over month. The year-over-year increase was 0.1 percentage point higher than in April (3.3%).
This PCE inflation reading largely matched the outlook compiled by Dow Jones. However, the headline index's month-over-month increase came in slightly below the market expectation of 0.5%.
The PCE price index reflects price changes for goods and services consumed by the household. The U.S. Federal Reserve (Fed) uses PCE as a key gauge when assessing whether it is achieving its "2% inflation" monetary policy goal.
Wall Street, however, is not assigning much significance to this readout. Although international oil prices plunged after the United States and Iran signed a memorandum of understanding (MOU) to end hostilities recently, this shift was not captured in May's PCE.
On the 17th, at the first Federal Open Market Committee (FOMC) meeting since Chair Kevin Warsh took office, the Fed kept the benchmark interest rate unchanged at 3.50% to 3.75% annually. But with inflationary pressures building again, some expect the Fed could raise rates as early as this year. Reuters said the latest inflation data increased the likelihood of additional tightening.
Despite higher prices, spending remained solid. U.S. consumer spending in May rose 0.7% from the previous month, a faster pace than April's 0.4%. Reuters analyzed that "consumers are sustaining spending, helped by larger tax refunds this year and a strong stock market, which partly offset the burden from higher oil prices."
However, with inflation outpacing wage gains, the effect of tax refunds fading, and household savings declining, U.S. household spending could slow starting in the third quarter, Reuters projected.