Fed’s core inflation measure rises to 3.4% in May

The Federal Reserve got another hot inflation reading in May, with its preferred core measure rising at the fastest annual pace since October 2023. For everyday investors, the report keeps the focus on interest rates because sticky inflation can push the Fed to hold rates higher or raise them, affecting borrowing costs, bond yields and stock valuations.

The Commerce Department said Thursday that the core personal consumption expenditures price index, or core PCE, rose 0.3% for the month and 3.4% from a year earlier. Core PCE strips out food and energy prices, which can swing sharply month to month, and Fed officials often use it to judge the underlying inflation trend.

Both core readings matched the Dow Jones consensus estimate, according to CNBC. The annual core rate was the highest since October 2023.

The broader PCE index, which includes all categories, showed prices running 4.1% higher on an annual basis, the fastest pace since April 2023, according to the Commerce Department. On a monthly basis, headline PCE increased 0.4%. The annual figure matched the Dow Jones estimate, while the monthly increase was 0.1 percentage point below expectations.

Energy kept pushing prices higher

Energy remained the biggest driver of the price increase. The Commerce Department data showed related goods and services prices rose 4% in May. Housing costs increased 0.3%, while financial services and insurance prices climbed 1.2%.

CNBC reported that this year’s inflation pickup has been tied largely to higher energy prices connected to the Iran war, with those costs gradually feeding into other parts of the economy. The report also said concerns have grown that price gains are becoming broader and are being affected by tariffs.

Heather Long, chief economist at Navy Federal Credit Union, said the inflation pressure is hitting household budgets. “Inflation is at a 3-year high due to the war in Iran and it’s painful for middle-class and moderate-income Americans,” Long said. “People are spending more on gas, along with healthcare and utilities. New Fed Chair Kevin Warsh has made his commitment clear to bring inflation down. The key will be how much relief happens by September.”

Consumers still spent more

The inflation report did not show a consumer pullback in May. Personal consumption expenditures, a measure of consumer spending, rose 0.7% for the month, according to the Commerce Department. That was 0.1 percentage point above the Dow Jones forecast and ahead of the monthly inflation rate.

Personal income also rose 0.7%, topping the 0.4% estimate. The personal saving rate increased to 3%.

That mix matters for markets because consumer spending is a major part of the U.S. economy. Strong income and spending can support growth, but if demand stays firm while prices keep rising, the Fed may see less room to ease policy.

The report followed the Fed’s latest meeting, where Chair Kevin Warsh and other officials used firm language on inflation. CNBC reported that the Federal Open Market Committee said it would “deliver price stability” after missing its 2% inflation target for five years. Officials also removed a previously indicated rate cut for this year and signaled the likelihood of a rate increase.

After the inflation data, stock market futures remained positive and Treasury yields slipped, CNBC reported. Traders still expected the Fed to approve a rate hike in September, though they trimmed the odds slightly.

Other data pointed to steady growth

Separate Commerce Department data showed gross domestic product, the broadest measure of economic output, grew at a seasonally adjusted annualized rate of 2.1% in the first quarter. Annualized means the quarterly pace is expressed as if it continued for a full year.

The GDP reading was revised up from 1.6% and beat the 1.7% forecast. The Commerce Department said the change largely came from a downward revision to imports, which are subtracted when calculating GDP.

The labor market also looked firmer than expected. Initial jobless claims fell to 215,000 for the week ended June 20, down 12,000 from the prior reading and below the 223,000 estimate, according to Labor Department data cited by CNBC.

This story draws on original reporting from CNBC.