PCE Inflation Rises in May as Spending Outpaces Prices

PCE inflation accelerated in May, leaving the Federal Reserve’s preferred price gauge above its 2% target while consumer spending grew faster than prices. This combination strengthens expectations for at least one policy-rate increase later in 2026.

PCE Inflation and Consumer Spending

The Bureau of Economic Analysis (BEA) released its "Personal Income and Outlays, May 2026" report on June 25, showing the headline personal consumption expenditures (PCE) price index rose 0.4% month-over-month and 4.1% year-over-year, the largest annual increase since April 2023. The monthly gain matched April’s advance.

Core PCE, which excludes volatile food and energy prices, increased 0.3% month-over-month and 3.4% year-over-year, marking the strongest annual core pace since October 2023.

Nominal consumer spending rose 0.7% in May, outpacing inflation, while real personal consumption expenditures—adjusted for inflation—increased 0.3%. Personal income also grew by $181.6 billion, or 0.7% month-over-month.

These figures indicate resilient household demand despite inflation remaining above the Fed’s 2% objective. The annual and monthly PCE readings broadly aligned with economists’ expectations, with the monthly gain slightly below forecasts, maintaining uncertainty about the near-term inflation trajectory.

Policy Outlook and Inflation Drivers

The Federal Open Market Committee (FOMC) kept the federal funds rate target range at 3.50%–3.75% in June, the fourth consecutive meeting without a change. Updated projections suggest further tightening is likely if inflation stays above the 2% goal. Policymakers focus on core PCE as a key indicator of underlying inflation momentum, making its persistence central to their decisions.

Fed funds futures imply about an 82% chance of at least one rate hike by December, with probabilities rising through September and October. These market expectations depend on incoming data rather than official commitments.

Energy prices complicate the outlook. International oil prices have recently fallen amid U.S.–Iran peace talks, but these declines were not reflected in May’s PCE data. If sustained, lower energy costs could ease headline inflation in coming months. However, services and shelter costs may keep core inflation elevated, limiting a rapid return to the Fed’s target even if energy-driven pressures ease.

Together, the May data and market signals suggest policymakers face a choice: maintain tighter policy longer to reduce core inflation or risk persistent price momentum while hoping energy price relief lowers headline inflation.