US core PCE inflation rises to 2.7% in May

Annual inflation in the United States, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, rose to 2.3% in May from 2.2% in April (revised from 2.1%), according to government data released Friday.

The personal consumption expenditures price index rose 0.1% for the month, pushing the annual inflation rate to 2.3%, according to the Bureau of Economic Analysis.

The US core PCE inflation index, which excludes volatile food and energy prices, rose 2.7% in the same period, following the 2.6% increase (revised from 2.5%) recorded in April.

The PCE Price Index and the core PCE Price Index rose 0.1% and 0.2%, respectively, every month.

Other details of the report showed that Personal Income declined by 0.4% every month, while Personal Spending fell by 0.1%.

The US Dollar Index edged lower with the immediate reaction to these data and was last seen losing 0.25% on the day at 97.10.

The core Personal Consumption Expenditures Price Index is forecast to rise 0.1% MoM and 2.6% YoY in May.
Headline annual PCE inflation is set to increase to 2.3% in the reported month.

On the US core PCE inflation, markets broadly expect the Federal Reserve to stand pat on interest rates in July.

The United States Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for May on Friday at 12:30 GMT.

This index is closely scrutinised as it is the Federal Reserve’s (Fed) preferred measure of inflation at a moment when traders are looking for hints about when the US central bank will resume interest-rate cuts.

Over the last twelve months, the core PCE inflation is set to tick a tad higher to 2.6% in May from 2.5% in April.

Meanwhile, the headline annual PCE inflation is seen rising to 2.3% from 2.1% in the same period.

Markets usually brace for a big reaction to the PCE inflation data as Fed officials consider this inflation gauge when deciding on the next policy move.

Markets currently expect an 18% chance of a July Fed rate cut, while pricing in a 70% probability of a cut in September, according to the CME Group’s FedWatch Tool.

The US Dollar (USD) hangs close to weekly lows against its major currency rivals amid reduced safe-haven demand, following the Iran-Israel ceasefire announced on Tuesday. Hawkish comments from Fed Chair Powell failed to lift the USD, helping EUR/USD stay close to the highest level so far this year at 1.1718.

The monthly core PCE figure will hold utmost relevance as it is not distorted by base effects. However, Fed Chair Powell already spilt the beans in the June post-policy meeting press conference, stating he expects the annual headline PCE price index to be at 2.3% and core PCE at 2.6% for the 12 months ending May.

Therefore, an upside surprise in the monthly core print is needed to affirm the hawkish Fed expectations, supporting the USD in an immediate reaction.

“Friday’s stronger-than-expected PCE is a reversal from the past few months of softening inflation data, and it suggests that higher prices from tariffs may be starting to work their way through the economy,” Robert Ruggirello, chief investment officer at Brave Eagle Wealth Management, said in a note Friday.

After its meeting last week, the Fed left interest rates unchanged for the fourth time in a row as policymakers stick to a “wait-and-see” approach on how President Trump’s tariffs will play out.

Trump, meanwhile, has ramped up his attacks on Fed Chairman Jerome Powell as he pushes him to slash rates – calling him a “very average mentally person” with a “low IQ” on Wednesday.

While the majority still lean toward a hold on interest rates, several Fed officials have joined Trump’s call over the past week to ease policy as soon as this fall or even by the central bank’s next meeting in July.

But if Trump’s tariffs start to hit inflation, that rate-cut campaign could fall apart.

“While one month does not make a trend, if we were to see another few months of escalating inflation data, it could push the Federal Reserve to continue its rate cut pause into 2026,” Ruggirello said.

(CNBC)

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