US consumers appear to have kept their wallets open in May, even as the Federal Reserve's preferred measure of inflation showed signs of warming back up. Data due at 8:30 am ET Thursday is expected to reveal another solid month of spending, but also a pickup in price pressures that could complicate the central bank's next move.
Economists surveyed by Bloomberg forecast personal consumption expenditures (PCE) to rise 0.6% in May, following a 0.5% gain in April. That would echo the strong "control group" retail sales reading for May, which strips out volatile categories like autos and gas. Personal income is expected to climb 0.4%, rebounding from April's flat reading, suggesting paychecks are still growing and supporting demand.
Inflation Heats Up
The catch is prices. The same report is expected to show headline PCE inflation running at 0.5% month over month, with core PCE — which excludes food and energy — up 0.3%. On a year-over-year basis, headline PCE is forecast to tick up to 4.1%, while core PCE is seen at 3.4%. Both remain well above the Fed's 2% target.
That combination of firm spending and sticky inflation means real (inflation-adjusted) consumption may rise only modestly, even if the nominal figures look punchy. For everyday investors, this is a reminder that strong economic data doesn't always translate into good news for markets — especially when it keeps the Fed from cutting rates.
What It Means for the Fed and Markets
A 0.3% core PCE print alongside 0.6% spending growth typically keeps the Federal Reserve in no-rush mode. When the economy is still humming and inflation isn't cooling fast enough, policymakers have little reason to lower borrowing costs. That dynamic often shows up first in market expectations: traders push projected rate cuts further out, and short-dated assets like fed funds futures and 2-year US Treasury yields move the most.
Those yields matter beyond the bond market. They're a key ingredient in the "discount rate" used to value future corporate profits. Higher yields mean a higher discount rate, which can weigh on stocks — especially rate-sensitive sectors like technology and real estate. So even a strong spending number can be a double-edged sword if it also signals inflation that's not cooling fast enough.
For context, recent market moves have already reflected shifting rate expectations. In a separate development, Micron surged 15% after hours as an oil plunge eased inflation fears, highlighting how sensitive stocks are to any sign of price relief. Conversely, if Thursday's data shows inflation staying hot, it could reverse some of that optimism.
Broader Economic Backdrop
The US economy has proven remarkably resilient, with consumers continuing to spend despite elevated interest rates and lingering inflation. The labor market remains tight, and wage growth, while moderating, is still supporting household budgets. However, the persistence of inflation — especially in services — has kept the Fed on hold since its last rate hike in July 2023.
Thursday's report will be closely watched for any signs that the inflation trend is shifting. A hotter-than-expected reading could reinforce the case for higher-for-longer rates, while a cooler number might revive hopes for a cut later this year. Either way, the data will feed into the next Fed meeting, where policymakers will update their economic projections.
For investors, the key takeaway is that the path of interest rates remains uncertain, and that uncertainty is likely to keep markets choppy. As always, it's worth focusing on the underlying trends rather than any single data point.
