The numbers are in, and they’re ugly. The Federal Reserve’s preferred inflation measure — the core Personal Consumption Expenditures (PCE) price index — hit 3.4% in May, the highest since October 2023. For anyone banking on rate cuts this year, this report is a bucket of ice water.
Economists had braced for a 4.1% annual headline rate. They got something worse: a core reading that strips out volatile food and energy prices, which the Fed watches like a hawk. Month over month, core PCE rose 0.4%, double the pace that would make Powell comfortable. This isn't a blip — it's a trend.
The Under-the-Hood Numbers Nobody Wants to Talk About
Services inflation is the monster under the bed. Prices for housing, healthcare, and financial services keep climbing, defying the Fed's rate hikes. Goods inflation? Actually cooling a bit — used car prices dropped, and apparel saw a rare decline. But services are sticky, and they account for two-thirds of consumer spending. That’s the problem.
Wage growth, while slowing from last year's peaks, is still running hot at around 4.5% annually. Employers are still hiring, consumers are still spending. That fuels demand-pull inflation, and the Fed can't let it run unchecked. As one trader on the floor told me this morning: “The economy is on a bender, and the Fed is the cop trying to break up the party.”
Rate Cuts? Not a Chance
Before this report, markets were pricing in a 50% chance of a cut in September. Those odds have now evaporated. The CME FedWatch Tool shows a 72% probability of rates staying put through December. The bond market is screaming: yields on the two-year Treasury jumped 10 basis points within an hour of the release.
“This is a nightmare for the doves. The Fed needs to see sustained evidence that inflation is heading back to 2%, and they're not getting it.” — James K. Galbraith, economist
Fed Chair Jerome Powell has been consistent: “We need greater confidence.” This report gives him zero confidence. If anything, it fuels the hawkish faction that wants to keep rates elevated well into 2027. The so-called “higher for longer” narrative isn’t just alive — it’s thriving.
Political Fallout: The White House Squirms
For the Biden administration, this is a political grenade. The president has been touting a “strong economy” on the campaign trail. But voters don’t feel it — grocery prices are up 22% since 2021, and rents have surged 30% in major cities. The phrase “Bidenflation” is already trending on social media.
White House press secretary Karine Jean-Pierre tried to spin it: “We’ve made progress, but there’s more work to do.” That line is getting tired. Americans are paying more at the pump, more at the register, and more for rent. They don’t care about core vs. headline — they care about their wallets.
What Comes Next: A Long, Hot Summer
If you think the Fed is going to ride to the rescue, think again. The next FOMC meeting is July 29–30. Expect language that’s even more hawkish. Maybe a mention of “further tightening” if data doesn’t improve. The dot plot from June showed only two quarter-point cuts in 2026. That might be too optimistic.
Consumers are starting to crack. Credit card debt hit a record $1.14 trillion in Q1. Delinquencies are rising. The savings rate has fallen to 3.2%, the lowest since 2022. The economy is running on fumes and plastic. When that stops, the Fed will finally have its recession — and with it, the inflation drop it craves.
But that’s a painful medicine. And for now, the patient is still refusing to take it.
One thing is certain: the 3.4% core PCE is a wake-up call. The inflation monster isn’t dead. It’s just taking a breather.
