U.S. PCE Inflation Hits 4.1% in May, Keeping Fed Hike Bets Firm

According to the Personal Consumption Expenditures (PCE) Price Index, annual headline inflation in the United States increased from 3.8% in April to 4.1% in May, therefore exactly matching market predictions and reaching its peak level since May 2023. While the headline monthly number increased 0.4%, the underlying PCE Price Index—which excludes erratic food and energy prices—also matched predictions with a 3.4% year-over-year rise and a 0.3% monthly gain. Though it confirmed inflation is still outside the Federal Reserve's comfort level, the release presented no great surprise as the important indicators showed exactly where economists had expected.

The report revealed stronger-than-expected consumer confidence below the surface, with both Personal Income and Personal Spending increasing 0.7% on a monthly basis, hence beating expert forecasts. Market response was somewhat subdued: The U.S. Dollar Index first dropped before leveling up 0.05% on the day at 101.65, continuing a week of general greenback strength that saw it most sharply rise against the New Zealand Dollar and Australian Dollar. The behavior of the currency indicates that merchants saw the consistent inflation statistics as adequate to keep the Fed in hawkish territory without inciting a right-now repricing spree.

Markets still believe the central bank will have to raise further despite a dramatic decline in crude oil prices after a U.S.-Iran agreement to reopen the Strait of Hormuz. Investors were already factoring in a roughly 65% to 70% chance of at least one rate hike by September, a position strengthened by strong job-market conditions and doubt on how quickly inflation would restart, according to the CME FedWatch Tool. The data lends credence to the idea that the Fed's next action will most likely be a hike rather than a cut, with core PCE still stick and household demand strong.