May US PCE Inflation Tops 4%, Leaves Fed Hike on the Table

  • U.S. inflation increased further in May, breaking above 4.0% for the first time in three years as the Middle East conflict boosted energy prices, keeping an interest rate ​increase from the Federal Reserve this year on the table. The personal consumption expenditures price index surged 4.1% in the 12 months through May, the largest increase and first reading above 4.0% since April 2023, the Commerce Department's Bureau ⁠of Economic Analysis said.
  • But with oil prices falling to pre-war levels on Thursday after the United States and Iran signed a preliminary peace deal, inflation likely peaked last month or is ‌close to doing so. An easing in gasoline prices is anticipated. The impact on inflation could, however, be offset by rising prices for technology goods like semiconductors and electronics amid an artificial intelligence investment boom.
  • Fertilizer shortages because of the conflict were expected to raise food prices, economists said. Service prices, which increased strongly last month, were unlikely to abate quickly.
  • The PCE price index climbed 0.4% over the month after rising by the same margin in April. The increase in PCE inflation was in line with economists' expectations. Goods ​prices increased 0.4% after rising 0.7% in April. Prices of gasoline and other energy goods shot up 6.5%, while food edged up 0.1%.
  • The price of services jumped 0.5% after rising 0.3% in April. They were lifted by a 0.8% advance in ​the cost of transportation services as higher jet fuel prices boosted airfares. The cost of financial services and insurance increased 1.2%, reflecting a stock market rally. There were also strong rises in the costs of healthcare and other services.
  • Excluding the volatile food ​and energy components, the PCE price index increased 3.4% year-on-year in May. That was the biggest gain since October 2023 and followed a 3.3% rise in April. The so-called core PCE inflation advanced 0.3% over the month for the third month in a row. The Fed tracks the PCE ‌inflation measures for ⁠its 2% target. The Fed last week kept its benchmark overnight interest rate in the 3.50%-3.75% range, but updated quarterly projections showed policymakers expected to raise borrowing costs this year.

(Source: Reuters)