The Federal Reserve’s preferred inflation measure came in above its 2% target in May, largely in line with expectations but higher on a headline basis. Headline Personal Consumption Expenditures (PCE) rose 4.1% year over year, up from 3.8% in April. Core PCE, which excludes food and energy, increased 0.3% month over month and 3.4% year over year. While the headline number looks firm, and is the highest since April 2023, the underlying details support a more optimistic outlook.
The increase was driven mainly by energy. Prices rose sharply following the Iran-related supply disruption, pushing gasoline to multi-year highs and widening the gap between headline and core inflation. However, those pressures have already started to ease. Oil prices moved lower through June as concerns around the Strait of Hormuz began to fade and shipping flows improved. Because these changes happened after the May data was collected, they are not reflected in this report. In that sense, the numbers likely capture the peak of the energy shock rather than a lasting shift in inflation.
This distinction matters for how to interpret the Federal Reserve’s response. While the Fed targets 2% inflation over the long run and uses PCE as its preferred measure given its broader scope, policymakers typically look through energy-driven volatility, focusing instead on underlying trends. On that front, core inflation remains elevated but comparatively stable, with a 0.3% monthly pace that is far more moderate than the headline print suggests. As energy prices normalize, that should help ease pressure on the broader index in the months ahead.
The broader macro backdrop also remains constructive. First-quarter GDP was revised up to a 2.1% annualized pace from the previous estimate of 1.6%, and initial jobless claims fell to a lower than expected 215,000, signaling continued strength in the labor market. At the same time, the personal savings rate rose to 3%, marking the first increase since January, suggesting some improvement in household balance sheets. Overall, the data points to an economy that is holding up well despite higher prices.
In our current view, the May PCE report represents a near-term peak rather than the start of a new inflation cycle. While inflation remains above target, and the Fed under Warsh is likely to stay cautious, the combination of easing energy prices, stable core inflation, and steady economic growth supports a continued move toward lower inflation. For investors, the key takeaway is to stay patient as short-term volatility in the data gives way to a more stable trend.
Disclosure
This material is provided by Gryphon Financial Partners, LLC (“Gryphon”) for informational purposes only. It is not intended as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Facts presented have been obtained from sources believed to be reliable, though Gryphon cannot guarantee their accuracy or completeness. Gryphon does not provide tax, accounting, or legal advice. Individuals should seek such guidance from qualified professionals based on their specific circumstances.