PCE inflation at 3.8% to test Fed's hawkish resolve this week

The Personal Consumption Expenditures price index rose 3.8% year-over-year in April, the Bureau of Economic Analysis reported May 28, marking its largest increase since May 2023. Core PCE, which excludes volatile food and energy categories, climbed 3.3% on a yearly basis — the highest since November 2023 and roughly 65% above the Fed's 2% target. On a month-over-month basis, headline PCE increased 0.4% while core PCE rose 0.2%, largely matching market expectations.

"The PCE data will either validate the Fed's hawkish pivot or force markets to reassess the probability of a rate hike," said economists at Deutsche Bank in a June 11 note, as the central bank under Chair Kevin Warsh has signaled a willingness to raise rates if inflation proves sticky. The June Federal Open Market Committee meeting produced updated projections showing nine of 18 officials now pencil in at least one quarter-point hike this year, with six of them seeing two, according to the summary of economic projections released last week.

Thursday's release comes after the May Consumer Price Index came in at a three-year high of 4.2%, driven largely by Iran war-related energy costs. The PCE index, which the Fed prefers because it accounts for how Americans adjust spending patterns in response to price changes, may show similar upward pressure from the energy component. However, oil prices have since retreated sharply — West Texas Intermediate crude settled around $76 a barrel last week, down from the upper $90s seen throughout May — following a U.S.-Iran deal to end hostilities and the potential reopening of the Strait of Hormuz.

What the data means for policy

The stakes for this week's PCE release extend beyond the headline number. If core PCE remains above 3%, it would strengthen the case for the Fed to follow through on its hawkish signals. The central bank hasn't adjusted the federal funds rate since December, when it delivered a quarter-point cut. Officials now envision lifting the benchmark rate by a median of a quarter-percentage point before 2027, according to the June dot plot.

A cooler-than-expected reading, by contrast, could ease pressure on the Fed and allow markets to price out the probability of a hike. The last time core PCE exceeded 3% for a sustained period was in 2023, when the Fed responded with 100 basis points of additional tightening over six months, pushing the S&P 500 down 8% during that stretch.

Micron and FedEx add to the week's event risk

Beyond the inflation data, two major earnings reports will test market sentiment. Micron Technology reports fiscal third-quarter results Wednesday, with analysts expecting earnings per share of $20.47 on revenue of $35.42 billion, according to LSEG. The memory-chip maker's shares have surged more than 800% over the past 12 months, driven by AI-related demand for high-bandwidth memory used in data center servers. The company's pricing commentary and any updates on multiyear supply agreements will be closely watched by investors in Nvidia, Broadcom and other chip stocks.

FedEx reports fiscal fourth-quarter results Tuesday evening in what will be a complex print, as the company navigates both the spin-off of its freight business and a shift to a calendar fiscal year. The shipping giant is expected to post revenue of $24.04 billion and earnings per share of $5.96, according to LSEG.

The S&P 500 closed last week at 7,500.58, up 0.93% for the holiday-shortened period, as optimism over the U.S.-Iran reconciliation lifted investor sentiment. The next PCE release is scheduled for June 25, covering May's data, with the following release due July 24.

This article is for informational purposes only and does not constitute investment advice.