Fed Faces 5.5% PCE Inflation as Markets Price In Up to 50 Basis Points
Updated
Updated · The Daily Economy · Jun 26
Fed Faces 5.5% PCE Inflation as Markets Price In Up to 50 Basis Points
1 articles · Updated · The Daily Economy · Jun 26
Summary
May PCE inflation accelerated to a 5.5% annualized rate from 5.0% in April, while core PCE rose to 3.9% from 3.0%, handing new Fed Chair Kevin Warsh a worsening inflation backdrop.
Energy prices, up 24.3% from a year earlier, helped drive the increase, but the pressure was broader: goods prices rose 4.8% year over year and services prices 3.8%, signaling inflation is not confined to fuel.
June Fed projections turned sharply more hawkish, with the median official seeing rates 25 basis points higher by year-end; five projected 50 basis points and one 75 basis points, reversing March expectations for no increase.
Markets are leaning even tighter, with CME data showing a 39.9% chance of a 25-basis-point hike by December, a 30.5% chance of 50 basis points and a 10.9% chance of more than 50.
Warsh has pledged to restore price stability, but with officials still projecting 2026 inflation at 3.6%, the Fed may need to harden its stance further if incoming data keep running this hot.
Can the Fed's interest rate hikes effectively combat inflation driven primarily by an overseas energy crisis?
Will the AI boom's productivity gains curb inflation, or will its energy demands continue fueling price hikes?
May 2026 Inflation Report: Persistent Price Pressures, Fed Policy Standoff, and Economic Fallout
Overview
In May 2026, consumer prices continued to rise, with the PCE Price Index increasing by 0.45% and the core PCE up 0.32%. The Federal Reserve responded by holding interest rates steady at its June meeting, emphasizing its commitment to bringing inflation down to the 2% target. However, policymakers are divided on the next steps: some expect no rate cuts for the rest of 2026, while others see the possibility of rate hikes. This cautious approach reflects ongoing inflationary pressures and uncertainty about the best path forward for monetary policy.