PCE inflation hits 4.1% in May

The Bureau of Economic Analysis said the Federal Reserve’s preferred inflation gauge accelerated in May, with the PCE price index rising 0.4% from the previous month and 4.1% from a year earlier.

That was the fastest annual pace since April 2023, according to the reporting, and it left inflation well above the Fed’s 2% target. Core PCE, which strips out food and energy, rose 0.3% in May and 3.4% year over year.

What the report showed

The May reading marked a step up from April, when PCE inflation had been 3.8% year over year. Coverage said the increase was driven in part by higher gasoline prices, with AP also pointing to more expensive semiconductors and computer equipment.

Barron’s live coverage said the annual rate reached 4.1%, while AP reported the Commerce Department data at 12:41 UTC on June 25, confirming the same figures. MarketWatch described the move as relevant to the Federal Reserve’s policy outlook and noted that the monthly gain was 0.4%.

Why it matters for the Fed

PCE is the inflation measure the Fed watches most closely. A hotter reading makes it harder for policymakers to argue that inflation is moving decisively back toward target.

The core measure is especially important because it is used to gauge underlying price pressure beyond swings in energy and food. At 3.4% annually, core PCE remained elevated even if some of May’s jump reflected gasoline and other energy-related effects.

What comes next

The immediate focus now is on whether June inflation data shows the May spike fading or broadening. Markets will also be watching for Fed commentary on whether the report changes the outlook for rates.

Higher inflation readings could keep pressure on the central bank to hold rates higher for longer, while consumers continue to face affordability pressure if price increases stay elevated.