PCE: Headline Inflation Cools Further in May But Core Inflation Barely Budges

What happened: The Personal Consumption Expenditures (PCE) price index rose 0.1% in May after increasing 0.4% in April. Core PCE — the Federal Reserve’s preferred inflation gauge — also rose 0.3% month-over-month. The annual increase in Core PCE remains high at 4.6% – down slightly from 4.7% in April, but still more than double the Fed’s 2% target.

What it means: Today’s numbers show inflation eased in May as consumer spending moderated. While spending on goods fell again in May, spending on services is also slowing. A rapidly expanding services sector – and its impact on price growth – was a big concern for the Federal Reserve at the end of 2022, but continued disinflation could give the Fed additional grounds to slow the pace of policy tightening.

Zillow Senior Economist Orphe Divounguy’s perspective: Today’s release is a small step closer toward the Federal Reserve’s objectives. The yield on the 10-year Treasury, which had been rising in part due to tough talk on inflation by Fed Chair Jerome Powell, fell on the news. More disinflation means more downward pressure on mortgage rates and in that scenario housing market activity would continue to improve.

The upward revision to GDP data in the first quarter points to a resilient US economy. Longer term interest rates depend on current inflation, inflation expectations and the economic outlook. While inflation is expected to moderate, stubbornly high core inflation and a still strong economic outlook point to long-term interest rates — and mortgage rates — remaining somewhat elevated and slow to come down.

Numbers to know: 

• The Personal Consumption Expenditures (PCE) price index rose 0.1% in May. The index was 3.8% higher when compared to a year ago, down from 4.3% in April.
• Core PCE increased 0.3% in May and is now up 4.6% from a year ago, down from 4.7% in April.
• Annual services inflation eased slightly to 5.3% in May from 5.5% in April. The housing component of the index is up 8.3% from a year ago easing from 8.4% in April. The rent index was up 8.7% in May from a year ago, easing from 8.9% in April.