Inflation report could fuel concerns over higher interest rates, even as oil prices fall – NBC News

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Inflation is rising — but U.S. consumers seem to be shrugging it off, for now.
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A key measure of price growth accelerated in May as surging oil prices pushed costs higher.
The personal consumption expenditures index rose to 4.1% on a yearly basis, the highest reading since April 2023. Stripping out volatile food and energy costs, so-called core PCE measured 3.4%, the highest reading since October 2023.
On a monthly basis, the index jumped 0.4%, the same reading as April’s, while the core reading climbed 0.3%, up from 0.2% in April.
But even after adjusting for the higher inflation, overall spending in the U.S. still rose 0.3% after showing zero growth in April. Inflation-adjusted incomes also accelerated 0.3% after declining by 0.5% in April.
But even after adjusting for the higher inflation, overall spending in the U.S. still rose 0.3% after showing zero growth in April. Inflation-adjusted incomes also accelerated 0.3% after declining by 0.5% in April.
That jibes with what banks are seeing, too. Bank of America’s extensive credit and debit card data showed that consumer spending rose in May, CEO Brian Moynihan said in recent interview with NBC News.
Consumers “are still spending on vacations and things like that, which is good for America. They still go out to eat, which is also good. Those are job-creating activities,” Moynihan said.
The monthly PCE report is the Federal Reserve’s preferred inflation gauge. New Fed Chairman Kevin Warsh has said the central bank is committed to bringing inflation back to its 2% target — a level it has failed to reach for the past five years.
Wall Street now anticipates the Fed will raise its key interest rate at least once by year’s end in a bid to counteract the stronger price growth.
By making it more expensive to borrow money, the Fed slows overall economic activity and, with it, the pace of price increases.
Until Wednesday, the direction of key interest rates had begun to decouple from that of oil prices, an unusual setup given they tend to rise together as dual threats of worsening inflation.
But things got back on track Wednesday, as oil prices hit new postwar lows and the yield on the 10-year U.S. Treasury note, seen as a benchmark for borrowing costs throughout the economy, fell nearly 0.1% to a level last seen in April. That’s an unusually large move for the bond market.
Treasury Secretary Scott Bessent said Wednesday that inflation is moving in the right direction.
“Now that we are, I believe, on the other side of this conflict, gas prices will come back down, inflation will come back to target,” he said after an appearance at the Economic Club of New York.
With the Iran war drawing to a close and vessels moving again through the Strait of Hormuz, some analysts predict Warsh will try to pursue a more “dovish” tack, or one designed to lower interest rates.
President Donald Trump remains dead set on bringing rates down, and in the run-up to his appointment, Warsh expressed some skepticism about traditional inflation gauges that would support a case for keeping rates elevated.
In a note to clients, research analysts with Citigroup said Warsh’s decision to create “task forces” to re-examine the Fed’s approaches could result in decisions that lean dovish.
“The market seems to underappreciate the flexibility implicit in appointing task forces to consider the drivers and measurement of inflation,” the analysts wrote.
Stock gains themselves have also shown signs of stuttering after a nearly unprecedented run of gains in April and May.
Over those two months, thanks largely to gains in tech and despite the Iran war, the S&P 500 rallied 16%, which has occurred only one other time outside of post-recession bounces. The other time was just a few months before Black Monday’s 1987 21% plunge.
The S&P 500 is down about 4% from its all-time high this month. The Fed’s telegraphing higher rates did not help — but the market may also simply have run out of room to run.
“Given we’d seen such a big rally that had stretched traditional valuation metrics, there simply wasn’t much space to rally further to start with,” Henry Allen, macro strategist at Deutsche Bank financial group, said in a note to clients this week.
Rob Wile is a Pulitzer Prize-winning journalist covering breaking business stories for NBCNews.com.
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