US May PCE Rises to 4.1% YoY, Hitting New High Since March 2023. Fed Rate Hike Expectations for the Year Heat Up

TradingKey - On Thursday Eastern Time, May inflation data released by the U.S. Bureau of Economic Analysis (BEA) showed that the year-over-year PCE price index was 4.1% in May, in line with market expectations and higher than the previous value of 3.8%; the U.S. month-over-month PCE rate was 0.4%, below the market expectation of 0.50%, with the previous value at 0.40%.

The core PCE price index, excluding food and energy, rose 3.4% year-over-year, matching market expectations and exceeding the previous value of 3.30%. The month-over-month core PCE rate was 0.3%, in line with market expectations, while the previous reading was revised to 0.3% from 0.20%.

Driven by rising energy prices due to the Middle East conflict, U.S. inflation headed further upward in May, with the year-over-year PCE rate crossing the 4% threshold for the first time in three years, and for the first time since April 2023. Although the month-over-month growth rate was largely in line with Wall Street expectations, the significant rebound in the year-over-year rate suggests that the battle against inflation is far from over.

The U.S.-led geopolitical conflict with Iran has pushed up core crude oil prices, which further passed through to refined products, driving up retail gasoline prices. Although crude and gasoline prices have experienced temporary pullbacks in recent weeks following a fragile ceasefire agreement, economists generally believe that inflation remains highly sticky and will persist at elevated levels for an extended period.

[Source: BEA]

Notably, against the backdrop of rising price levels, U.S. consumer spending momentum remains highly resilient and has shown no significant signs of easing.

In May, personal consumption expenditures jumped 0.7% from April, exceeding the forecast of 0.6% and also higher than the 0.4% gain in April. Real personal consumption expenditures, adjusted for inflation, rose 0.3% from April, beating the forecast of 0.2%.

Reports indicate that prior to the outbreak of the conflict, U.S. consumers had already been facing ongoing upward price pressure stemming from the Trump administration's broad import tariffs.

The strong resilience of U.S. consumer spending is primarily supported by better-than-expected growth on the income side. In May, U.S. personal income rose 0.7% month-over-month, significantly higher than the market consensus of 0.4% and marking a sharp recovery from the flat growth in April.

This income growth was driven by multiple factors: first, a steady increase in wages and compensation; second, the second round of disaster relief payments distributed under the "U.S. Relief Act of 2025," which significantly boosted the incomes of farmers. Additionally, the labor market has shown significant recovery for three consecutive months, further supporting income growth.

The Federal Reserve last week announced it would keep the federal funds rate target range unchanged at 3.50%-3.75%. However, updated quarterly economic projections showed that policymakers' concerns over inflation risks have intensified significantly, with expectations for a rate hike this year clearly heating up.

Market analysts suggest that a further rise in core inflation may continue to intensify pressure on the Federal Reserve to raise interest rates this year. Although crude oil prices have recently undergone a deep correction, the lagging effects of the earlier energy shock on the supply chain continue to feed through, and prices across multiple product categories are expected to maintain an upward trend.

On the other hand, with employment growth picking up again, real wages steadily recovering, and the wealth effect from the stock market rally providing solid support for consumer spending, it will not be easy for inflation to cool down quickly.

Currently, traders are betting that the first rate hike could land as early as September, with a high probability of another one later this year.