US inflation rises above 4% and adds to Fed rate hike bets – PCE

The US personal consumption expenditures price index (PCE), Fed’s preferred inflation gauge, rose 4.1% y/y in May from unrevised 3.8% previous month, in line with expectations.

May’s figure shows the largest increase and the first break above 4.0% in over three years, with inflation moving further from the central bank’s 2% target, adding to growing bets for Fed rate hike, as early as September.

Core PCE index that excludes the most volatile food and energy components, increased 3.4% y/y in May after rising 3.3% in April, also meeting forecasts.

The Fed kept its benchmark overnight interest rate in the 3.50%-3.75% range at the policy meeting last week, but updated quarterly projections showed policymakers expected to raise borrowing costs this year amid growing concerns about inflation.

Economists expect inflation, sparked by the US/Israel war against Iran, to stay elevated for some time despite the latest drop in oil prices due to a ceasefire and initial peace deal which continues to fuel optimism.

Separate report showed that consumer spending, which accounts for more than two-thirds of economic activity, jumped 0.7% in May compared to 0.4% rise in April.

The data also showed that consumers have maintained their spending, as larger tax refunds and stock market rally have partially compensated negative impact from higher fuel prices.

Although rise in spending reflects higher prices, May data also signal that consumption might be on track to speed up in the second quarter after slowing in the first three months of the year.