May PCE Expected to Show Rising Inflation

Key Takeaways

• The annual rate of PCE inflation is forecast to be 4.1% by FactSet, its highest level since April 2023.
• Economists expect May to mark this year’s inflation peak, as lower oil prices and easing tariff effects might curb price pressures in the coming months.
• Economists are pricing in interest rate hikes later this year, even as the Fed signals a more aggressive approach to monetary policy.

Economists expect the May Personal Consumption Expenditures Price Index report to show another month of sticky inflation, with the annual rate reaching its highest level since April 2023 as higher energy prices continue to fuel consumer price pressures.

Forecasts call for the May PCE Index—the Federal Reserve’s preferred measure of inflation—to rise 4.1% from its year-ago levels, according to Factset. That’s up slightly from April and well above the Fed’s 2% target. On a monthly basis, PCE is expected to rise 0.5% in May. Core PCE is expected to rise 0.4% month over month and 3.3% year over year.

With ongoing US/Iran talks that could reopen the Strait of Hormuz and eventually ease inflation driven by high energy prices and tariffs, Morningstar senior economist Preston Caldwell expects consumer prices to subside this year. “Assuming the tariff effect starts to fade, some of the drivers of goods inflation should fall,” he says. “As energy prices fall as well, that all should put downward pressure on inflation going forward, assuming the Strait doesn’t close again for an extended period.”

Economists widely expect May to show inflation at its peak this year. However, even with price pressures anticipated to subside and relatively scant guidance from Warsh’s Fed, the case is growing for at least one interest rate hike in 2026.

May PCE Inflation Report Highlights

• PCE report release date and time: Thursday, June 25, at 8:30 a.m. EDT
• The PCE deflator is forecast to rise 0.5% in May after rising 0.4% in April.
• Core PCE is forecast to rise 0.37% in May after rising 0.24% in April.
• The PCE is forecast to rise 4.1% year over year in May after increasing 3.8% in April.
• Core PCE year over year is forecast to rise 3.3% in May after increasing 3.3% in April.

Inflation Remains Sticky, for Now

High energy prices are still a key driver of headline inflation. The numbers are expected to rise further from April, when energy prices reached a three-year high. Economists at Bank of America, Goldman Sachs, and UBS expect the May reading to largely reflect what was already seen in the May CPI and PPI data.

“Headline measures of [the Producer Price Index] were hot again this month as supply side pressures from the Iran war continue to build and the rally in equities pushed financial services prices higher,” Bank of America economists wrote. They anticipate the PCE to rise 4.1% over the year, in line with the consensus forecast.

That also matches UBS’ readings. Its economists project the headline PCE to rise 0.49% in May, with a yearly reading of 4.10%. They expect core PCE to rise 0.36% in May, up 3.45% from year-ago levels. Although higher oil prices are expected to boost the May report, declines in June have economists expecting inflation to begin cooling after the upcoming report. “We expect this May will be the peak for headline PCE price inflation, which is likely to decline notably in June, as AAA retail regular-grade gasoline prices are down around $0.56 per gallon since May 20,” UBS economists wrote.

Caldwell says that core services excluding housing continue to show persistent inflation, rising from 3.3% year over year in the fourth quarter of 2025 to 3.7% now. Slowing wage growth is positive for easing services inflation, since wages are closely tied to labor costs.

UBS economists also expect core prices to slow later this year, “though the June core PCE price inflation is projected to be roughly similar to the May level before a clearer slowing begins in July.”

Fed to Take a Meeting-by-Meeting Approach

Last week’s Fed meeting did little to change Caldwell’s expectations on monetary policy. Although policymakers took a slightly more hawkish tone than markets anticipated, Caldwell said the Fed will decide as it digests incoming inflation data.

“Things were slightly more hawkish than the market had thought, in terms of Warsh’s remarks. I think Warsh himself has been quite adamant that [the Fed] is going to be taking things very much on a meeting-by-meeting basis,” he says. “We can’t infer much about future decision-making from what he said so far.”

Economists at Deutsche Bank expect the Fed to raise rates twice this year, bringing the federal funds rate to 4.1%. They expect policymakers to pause rate decisions in 2027, with cuts not rolling until 2028.

“The Warsh era began with a promise to restore price stability,” Deutsche Bank analysts wrote. “We believe the Fed will need to back its strong language with action sooner rather than later.”