US May PCE Spikes 4.1%, Will the Fed Hike Rates Again in H2?

The US Personal Consumption Expenditures (PCE) price index surged 4.1% in May year-over-year, hitting its highest level in nearly three years. This hotter-than-expected inflation data has reignited fears of additional interest rate hikes by the Federal Reserve in the second half of the year.

Sticky Inflation: Behind the 4.1% PCE Spike

According to the US Commerce Department, the headline PCE rose by 4.1%, while the core PCE—which excludes volatile food and energy prices—increased by 3.4%. The primary drivers are identified as soaring global oil prices due to geopolitical risks and surprisingly resilient service consumption within the US. Despite prolonged high interest rates, the remarkable elasticity of US consumer spending is acting as an upward pressure on inflation.

Rising Probability of Further Rate Hikes This Year

Following this release, expectations for an early Fed rate cut have completely evaporated. According to the CME FedWatch Tool, the market is now beginning to price in the possibility of 'additional hikes' rather than cuts. Some Wall Street analysts are warning that a benchmark rate hike could be executed as early as the September Federal Open Market Committee (FOMC) meeting, causing major tech stocks, such as those on the Nasdaq, to immediately show weakness due to their high interest rate sensitivity.

Frequently Asked Questions

• Q. Why is the PCE index more important than the CPI?
  A. The PCE dynamically reflects the actual weighting of items consumers spend money on, making it the Federal Reserve's preferred core gauge for tracking inflation trends over the Consumer Price Index (CPI).
• Q. How does a resumption of rate hikes affect the stock market?
  A. Additional rate hikes increase corporate borrowing costs and discount the present value of future earnings, exerting downward pressure particularly on highly valued technology and growth stocks.