The Personal Consumption Expenditures (PCE) Price Index showed quickly rising prices as it increased from 3.8% to a 4.1% annual rate – the highest in 3 years. This is more than double the Fed’s 2% target for inflation (red line on graph below). However, the Fed mostly looks at the Core PCE Price Index (black line), which removes volatile food and energy components. Core PCE also continued to move higher as inflationary pressures further spread beyond just the energy sector. It rose to a 3.4% annual rate, up from 3.3%, which is a notable uptick when compared to the last couple of years.
The reheating of inflation over the last few months has been largely attributed to rapidly rising oil prices stemming from the conflict in the middle east. As a result, many investors are hopeful that falling oil prices, driven by progress toward peace in the region, could help moderate inflation going forward. However, this latest release revealed that price pressures are becoming more entrenched in various sectors. As shown in the chart below, 4 out of the 5 categories with the largest increases in expenditures were Services. The only non-services category in the top 5 was gasoline and energy which was ranked the 4th highest. This means that even as oil prices are coming down, inflation could prove much more problematic, keeping rate hikes on the table for later this year.
