US May Inflation Hits 4.1%, Reaching 4% Threshold for First Time in 3 Years

The price of goods and services purchased by U.S. consumers (PCE price index) rose 4.1% year-on-year in May, re-entering the 4% range for the first time in three years. The core PCE price index, excluding volatile food and energy prices, also increased by 3.4%. The release of these inflation figures has significantly heightened the possibility of further interest rate hikes by the U.S. central bank (the Fed), with financial markets already pricing in a potential hike as early as September.

The Bureau of Economic Analysis (BEA) announced on the 25th (local time) that the Personal Consumption Expenditures (PCE) price index for May rose 4.1% compared to the same month last year. This marks the first time inflation has exceeded 4% since April 2023 and represents the highest annual increase in three years. On a month-on-month basis, PCE prices increased by 0.4%. The core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy items, rose 3.4% year-on-year, up from 3.3% in April and the highest level since October 2023. The month-on-month increase for core PCE was 0.3%, unchanged from April. The Fed places greater emphasis on core inflation when assessing long-term inflation trends. Energy price surges, attributed to the conflict in the Middle East, have stimulated price increases.

U.S. personal consumption expenditures increased by 0.7% month-on-month in May, and personal income also rose by 0.7%. This consumer spending power is attributed to an expansion in tax refunds this year and a sustained rally in the stock market, with households continuing to spend by leveraging tax rebates and existing savings. Second-quarter U.S. Gross Domestic Product (GDP) growth forecasts have been revised upwards to as high as 3.0% on an annualized basis, while the final estimate for first-quarter GDP growth was 2.1% annualized. Robust labor market indicators support the Fed's ability to maintain its high-interest-rate policy for an extended period to curb inflation.

The release of these inflation figures has significantly increased the likelihood of further interest rate hikes by the Federal Reserve (Fed). Financial markets are factoring in a potential rate hike as early as September. Major markets, including the New York Stock Exchange, are closely watching the PCE data, with investor sentiment fluctuating amid mixed concerns over rate hikes and expectations for improved corporate earnings.