Inflation worsened in the May PCE report (as expected)

• Headline PCE +0.45%, +4.07% annually

• Core PCE +0.32%, +3.41% annually

Both Headline PCE, which includes food and energy prices, and Core PCE rose in line with the forecasts. Both also showed continued acceleration on the back of the supply shock and tension from the Iran conflict.

❗Headline PCE hit its highest annual reading since May 2023

❗Core PCE hit its highest annual reading since November 2023

For headline PCE, this also marks the fastest three-month (annualized) acceleration since July 2022. An important caveat is that it was on the way down. Inflation hasn’t been accelerating upward this fast since late 2021. 

The Cleveland Federal Reserve projects that June headline inflation will start to break and head down below 4% for headline CPI and PCE. The Federal Reserve’s meeting last week struck a hawkish tone, and chair Kevin Warsh was clear that the committee intends to focus on inflation seriously. This PCE reading is one of the reasons why.

If inflation can come down faster than expected, then the Fed may be able to take a softer tone, although we may hear far less from the Fed under Warsh. Either way, falling inflation in June will be a relief.