Announced this morning, the PCE Deflator increased 0.1% in May as expected and was up 2.3% on an annual basis. The Core PCE Deflator, which excludes food and energy prices and is closely monitored by the Federal Reserve for policy decisions, increased 0.2% in May, slightly more than expected. The core rate grew 2.7% on an annual basis, which is one tenth higher than the previous month’s revised figure.
Meanwhile, Personal Income fell -0.4% in May, sizably less than expected and offsets some of the previous month’s increase. Personal Spending fell -0.1% in May, also less than expected and is lower than the previous month. The personal savings rate as a percentage of disposable income was 4.5%, less than the previous month as income fell more than spending.
Overall, the headline PCE deflator was relatively flat in May, while the core rate increased more than expected. The annual measure for the core rate ticked higher and is moving farther away from the Federal Reserve’s 2% target. Personal income fell in May partly due to lower farm payments and social security payments, not from wages. Spending fell slightly as spending on goods fell while spending on services was relatively flat.
Consumers appeared to slow down in May as they consider ongoing tariff negotiations and a heightened geopolitical landscape. Meanwhile, annual core inflation levels tick higher, giving the Federal Reserve more to contemplate regarding the direction of monetary policy. How well the labor market holds up in this environment will be a key factor for the economy and markets in the coming weeks as we head into the quarterly earnings season.
In all, the yield on the 10-year US Treasury ticks lower following the report and equity futures are higher as we head into the market open.
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