The PCE inflation report will either calm Wall Street or ignite fears of a restrictive Fed
The Federal Reserve and its new chair, Kevin Warsh, are eyeing fresh inflation data to inform U.S. interest-rate policy.
Markets have already started to price in one rate hike. A hot PCE report could lead to a second hike being priced in.
The personal-consumption-expenditures report, or PCE, for May is likely to have a significant impact on the market. Even a reading that's in line with expectations will be closely scrutinized, as investors will want to understand which components of inflation are in control of the economy.
Analysts forecast headline PCE to show prices rising by 0.5% in May, up from 0.4% in April, and climbing by 4.1% on a year-over-year basis, up from 3.8%. Meanwhile, core PCE is expected to show a rise of 0.3%, up from 0.2%, and, on an annual basis, of 3.4%, up from 3.3%. That would be the hottest core PCE reading since the fall of 2023. The last time headline PCE was over 4% was in the spring of 2023.
Economic calendar: Data on inflation, economic growth and more remain on week's agenda
Inflation factors
Will the spike in oil-related inflation prove temporary or will underlying inflation pressures make it difficult for inflation to move lower?
While the spike in oil prices has been a major contributor to the rise in inflation, the market will be more concerned with underlying inflation measures, which are less tied to the impact of the oil spike. For example, in April, housing jumped by more than 0.5% on a month-on-month basis; a sustained move higher could prove problematic for the Fed and the market, because, if consistent, it could lead to stickier inflation in the future.
Additionally, the costs of financial services and insurance declined by 0.4% in April, reversing a 0.6% increase in March. It is possible that this value jumps in May, given that PPI portfolio-management fees jumped more than 4.8% month-on-month in May, which could indicate higher financial-services inflation in the PCE report. The financial categories in the PCE and the producer-price index tend to track one another over time.
These are just two examples of the pieces within the PCE report - expected on Thursday morning before the stock market opens - that can determine whether the spike in oil-related inflation will prove temporary or whether underlying inflation pressures will make it difficult for inflation to move lower.
To this point, the lowest core PCE since 2022 has been 2.6%, in April 2025. Right now, core PCE is running at three- and six-month annualized rates of change around 3.8%, suggesting year-over-year core PCE could still be heading higher.
Watch the yield curve
The bond market is not going to take any of this lightly.
Markets have already started to price in higher rates from the Fed. Fed-funds futures currently imply roughly 11/2 rate hikes by year-end, with the expected policy rate rising to around 4% by December. A hotter PCE report would most likely push that likelihood up further and could even lead to a second hike being priced in. An in-line report showing elevated inflation pressures that suggest core PCE is going to have a tough time coming back down, even with fuel prices dropping, could still increase the likelihood of a hike.
The bond market is not going to take any of this lightly, either, and the clearest sign of this would be a continued flattening of the yield curve. The 10-year Treasury yield BX:TMUBMUSD10Y minus the 2-year Treasury yield BX:TMUBMUSD02Y has flattened to 30 bps (0.30%) from around 70 bps (0.70%) in February. This as the market reassesses the risk of Fed rate hikes.
The interesting part is that the 2-year is rising faster than the 10-year. At this stage, the flattening appears to reflect a market that believes policy is not restrictive enough to bring inflation back to target, rather than a market focused primarily on slowing growth. So far, this move in the yield curve looks like the one seen in the early stages of 2022, when the Fed was trying to catch up to inflation and began its aggressive rate-hiking cycle.
The May PCE report isn't likely to be taken for granted by the market; it will be combed carefully and methodically for signs to either add to or dial back rate-hike bets. The bond market's reaction will be particularly important to watch, especially the 2-year Treasury yield; a sharp rise would suggest additional rate hikes are being priced in.
The inflation situation is delicate at this point. So, too, is the market.
Michael Kramer is a member and investment-adviser representative with Mott Capital Management. This report contains independent commentary to be used for informational and educational purposes only. Read Kramer's disclosures here.
-Michael Kramer
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(END) Dow Jones Newswires
June 24, 2026 21:06 ET (01:06 GMT)
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