Core inflation rate hit 3.4% in May, highest since October 2023, Feds preferred gauge shows

The Federal Reserve's primary price gauge rose at its highest level since 2023, reinforcing the target="_blank" kwlink="6384064000816950219725">target="_blank" kwlink="6384064000971585773080">central bank's recent tough talk on inflation.

Excluding food and energy, the personal consumption expenditures price index showed a 3.4% annual rate after rising 0.3% for the month, both in line with Dow Jones consensus. The core reading was the highest since October 2023.

For the all-items reading, the PCE index showed inflation running at a seasonally adjusted 4.1% annual rate, the highest since April 2023, according to a Commerce Department report Thursday. On a monthly basis, PCE accelerated 0.4%. The annual level was in line with the Dow Jones consensus estimate while the monthly reading was 0.1 percentage point below.

While Fed officials look at both headline and core rates, they generally consider the latter a better measure of long-run trends, particularly in light of this year's inflation surge that was driven largely by an acceleration in energy prices tied to the Iran war that have slowly been seeping into other parts of the economy.

Even with the elevated inflation levels, consumer spending for the month came in stronger than expected.

Personal consumption expenditures, a proxy for spending, rose 0.7% for the month, 0.1 percentage point above the forecast and ahead of the inflation rate. Personal income also rose 0.7%, well above the 0.4% forecast. The personal saving rate rose to 3%.

The report comes a little more than a week after the Fed and new Chairman Kevin Warsh delivered what markets widely viewed as a tough talk on rates and inflation.

Warsh in particular stressed the importance of price stability, with the Federal Open Market Committee adopting language in its post-meeting statement unequivocally stating that it would “deliver price stability” after missing its 2% inflation target for five years running. In addition, officials took off a previously indicated rate cut this year and indicated a likelihood of a hike.

However, the inflation picture has been complicated. Fed officials generally look through the kind of supply-driven spike that the energy surge has driven, but concerns are rising that price increases are becoming more widespread and also are being fed by tariffs.

Multiple Fed officials dissented at the April meeting because the statement had included “forward guidance” that d toward further cuts coming, and that language was removed from last week's statement.

Other data released Thursday shows the economy in a relatively strong position.

Gross domestic product, the broadest measure of growth, rose at a seasonally adjusted annualized pace of 2.1% in the first quarter, according to the last of three readings. That was up from the prior indication of 1.6% and better than the forecast for 1.7%. The Commerce Department said the change largely reflected a downward revision to imports, which subtract from GDP.

Also, initial jobless claims fell to 215,000 for the week ending June 20, down 12,000 from the prior reading and better than the estimate for 223,000.

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