All Eyes On PCE: Hot Inflation Prints Open Door For Fed Rate Hikes

The PCE price index, the Fed’s favored inflation gauge, is due Thursday with economist surveys signaling a sharp May inflation jump that will test policymakers’ commitment to taming price pressures.

Dow Jones and Wall Street Journal consensus forecasts put headline May PCE at 4.1% YoY, up from April’s 3.8% to hit a 2023 peak, while month-over-month growth is set to rise to 0.5% from 0.4%. Core PCE — the benchmark tracking lasting inflation trends excluding food and energy — is projected to edge up to 3.4% YoY versus 3.3% in April, its highest reading since October 2023, with monthly growth climbing to 0.3%. Core readings have stayed above the Fed’s 2% target without interruption since 2021.

The temporary spike in headline inflation stems from May’s Iran conflict-driven gasoline rally. Crude prices have eased after a bilateral peace accord, yet firmer core inflation proves price pressure runs deeper than one-off geopolitical oil swings.

Persistent core inflation would force the Fed to lift benchmark rates and lift broad borrowing costs. CME FedWatch data as of Wednesday pegs just a 34% chance of a 25bp hike at the July FOMC. Thursday’s PCE print will sharply shift these odds, and multiple Fed officials have recently flagged elevated inflation risks, hinting additional tightening remains on the table for 2026.



Structural Headwinds Keep Inflation Sticky

Inflation trends showed improvement prior to the Iran standoff: cooling shelter costs pulled core PCE closer to the 2% target, and markets widely priced Fed rate cuts to backstop employment. Tariff price pass-through and disrupted Hormuz shipping have since reignited inflation threats.

Near-term energy relief has arrived via the US-Iran truce, which restored heavy tanker traffic through the Strait of Hormuz and dragged crude back to pre-conflict price bands. A far more worrying long-term shift is seen in durable goods pricing: April durable goods costs rose 3.3% YoY, reversing a pre-pandemic deflationary trend that long offset broader inflation.

Mott Capital’s Michael Kramer warned this reversal rewrites the core inflation dynamic. Without durable goods acting as a natural disinflation buffer, current interest rates may fail to pull inflation back to the 2% objective.

Markets are focused less on volatile oil-linked inflation and more on resilient underlying price metrics. April shelter costs rose over 0.5% month-on-month, risking entrenched sticky inflation if gains persist. While financial services costs dipped 0.4% in April, May PPI data showed asset management fees surged 4.8%, pointing to a services inflation rebound in the upcoming PCE report.