U.S. May PCE Inflation Rises 4.1%... Highest in Over Three Years

Energy Prices Drive Inflation
Consumer Spending Remains Strong; Boosted by Tax Refunds and Stock Market Gains
Purchasing Power Pressure Persists for Lower-Income Households
Increased Possibility of Fed Rate Hike
However, Some See May as the Peak of Inflation

The U.S. Personal Consumption Expenditures (PCE) price index for May soared to its highest level in more than three years. Amid a surge in energy prices following the Iran war, even core inflation has risen again, increasing pressure on the Federal Reserve (Fed) to hike interest rates within the year. However, despite high inflation, both consumer spending and income have grown more strongly than expected, leading some to assess that the U.S. economy continues to maintain a solid trajectory.

The U.S. Department of Commerce's Bureau of Economic Analysis (BEA) announced on the 25th (local time) that the May PCE price index rose 4.1% compared to the same month last year. This is the highest increase since April 2023. Compared to the previous month, it rose by 0.4%.

The U.S. Department of Commerce's Bureau of Economic Analysis (BEA) announced on the 25th (local time) that the May PCE price index rose 4.1% compared to the same month last year. This is the highest increase since April 2023. Compared to the previous month, it rose 0.4%.

Excluding the volatile food and energy sectors, the core PCE price index increased 3.4% year-on-year and 0.3% month-on-month. The year-on-year increase in core PCE is the highest since October 2023. The PCE price index is the Fed's preferred inflation gauge when making monetary policy decisions.

Rising prices were primarily driven by the energy sector. Following the Iran war, international oil and gasoline prices soared, causing significant increases in the prices of energy-related goods and services. In addition, prices in financial services and insurance, housing, healthcare, and transportation services also continued to rise, suggesting that inflationary pressures are spreading beyond the energy sector.

Despite high inflation, consumer spending was stronger than expected. Personal consumption expenditures in May increased by 0.7% compared to the previous month. Real consumer spending, excluding the impact of inflation, also grew by 0.3%, breaking out of the stagnation seen in April. Personal income rose by 0.7%, while wages and salaries increased by 0.4%. Real disposable income showed an increase for the first time this year.

Factors supporting resilient consumption include high tax refunds, a robust labor market, and rising stock prices. On the same day, newly filed unemployment claims were reported at 215,000, down by 12,000 from the previous week, alleviating some concerns about a slowdown in the labor market. The first-quarter gross domestic product (GDP) growth rate was also revised upward to an annualized 2.1%.

However, the burden on households is increasing. The savings rate remained low at 3.0%. With inflation outpacing wage growth, purchasing power pressures on the middle and lower income classes have persisted. Some consumers are reported to be seeking discounted products or postponing purchases of large durable goods due to higher costs for gasoline, medical expenses, and utility bills.

The latest data is interpreted as supporting the Fed's hawkish stance. While the Fed kept the federal funds rate unchanged at 3.50~3.75% at last week's Federal Open Market Committee (FOMC) meeting, it reiterated its commitment to price stability and left open the possibility of a rate hike within the year. There is speculation in the market that a rate increase could come as soon as September.

However, with recent progress in peace negotiations between the U.S. and Iran leading to a decline in international oil prices, there is also the possibility that the May inflation rate marked a peak. The fall in oil and gasoline prices could help ease consumer inflationary pressures going forward. Nevertheless, as the energy shock is being passed on to other items through supply chains and core services inflation remains high, some analysts believe the pace of inflation moderation may be limited.

This content was produced with the assistance of AI translation services.