Personal Consumption Expenditures (PCE)
The Fed’s preferred gauge of inflation, the PCE Index, came in largely as expected for May. Headline inflation rose 0.1% for the month and 2.3% year over year — right on target with market forecasts.
The Core PCE, which excludes food and energy and is the Fed’s primary focus, rose 0.2% on a rounded basis, slightly above the expected 0.1%. However, the actual reading was 0.18%, which isn’t too far off from the Fed’s comfort zone. On an annualized basis, that monthly figure puts Core PCE just above the Fed’s 2% target. That said, April’s number was revised higher, pushing the year-over-year Core rate up to 2.7%, slightly above the 2.6% estimate.
While recent monthly data looks encouraging, comparisons to last year’s very low readings are making it difficult to show meaningful year-over-year improvement. This dynamic will likely remain a challenge until early 2026, unless we begin to see very soft monthly inflation prints.
There is some positive momentum:
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The 12-month Core PCE is at 2.7%
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The 6-month trend is running at 2.9%
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The 3-month trend, however, has dropped to just 1.6%
This suggests inflation is behaving better in recent months, especially over the last quarter.
Notably, there weren’t many major contributors to inflation in May’s data. Shelter, which makes up about 18% of Core PCE, was the biggest driver. It rose 0.26% month over month — a moderate pace — and has been gradually slowing. On a year-over-year basis, shelter inflation is still running at 4.1%, but is slowly catching up to more current market-based measures like Zillow, which shows rents up just 3.2%.
One soft spot in the report was Personal Incomes, which fell 0.4% for the month, missing the +0.3% forecast. However, this drop follows a one-time surge in April from Social Security true-up payments, so the decline essentially resets that temporary bump. Meanwhile, private sector wages rose 0.4% in May and are up 4.6% year over year — still a healthy pace.
Consumer Spending also came in below expectations, falling 0.1% instead of the anticipated +0.1%, indicating that consumers may be pulling back a bit.