The Fed's preferred inflation measure rose at its fastest pace since October 2023

The core Personal Consumption Expenditures (PCE) price index—the Federal Reserve’s preferred measure of inflation, which excludes volatile food and energy prices— — rose 3.4% year-over-year in May, according to data from the U.S. Bureau of Economic Analysis (BEA). This figure is the highest since October 2023, notes CNBC. It marks a slight acceleration from April’s rate of 3.3%, reports Barron’s.

On a month-over-month basis, this figure rose by 0.3% in May, up from 0.2% in April, the publication notes. Economists had expected the core PCE index to rise by 0.4% in May, with a year-over-year increase of 3.3%.

Meanwhile, the overall Personal Consumption Expenditures (PCE) price index rose 4.1% year-over-year in May, according to BEA data (the increase was 3.8% in April). On a monthly basis, the overall PCE rose 0.4% in May (the same rate of growth as in April). However, these figures fell short of forecasts by economists surveyed by FactSet, who had expected PCE to rise by 0.5% last month, notes Barron’s.

The agency also released the third and final estimate of U.S. gross domestic product (GDP) for the first quarter, adjusted for inflation. On an annualized basis—adjusted for seasonal fluctuations—the economic growth rate was 2.1%, whereas the previous (second) estimate had indicated growth of 1.6%.

S&P 500 futures rose 0.8% following the release of macroeconomic data, Nasdaq 100 futures jumped as much as 2.3%, and Dow Jones futures rose 0.25%.

Most of the monthly increase in PCE reflects the impact of the war in Iran, which has led to a rise in global fuel prices, notes Barron’s. Since energy prices began to decline after the U.S. signed a memorandum of understanding with Iran, May should mark the peak of price increases—unless hostilities resume, the publication notes.

Higher oil prices persisted throughout several months of the war, but studies show that they drive up production and transportation costs across the entire economy, which are then passed on to food and basic goods, the publication explains.

“These figures were released even before the recent sharp drop in oil prices, which is expected to lead to a decline in the overall inflation rate <...>,” says Mohammed Abdullah El-Erian, chief economic advisor at the German insurance company Allianz. His opinion is published in Barron’s. Persistent inflation in the services sector and growing demand for resources driven by the development of artificial intelligence will likely remain long-term inflationary factors, notes Joe Brusuelas, chief economist at the consulting firm RSM US LLP. “The return to 2.5% inflation will be a long and difficult process,” he added.

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