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The numbers: Inflation moved higher in May while consumer spending continued to show strength, the government said Friday. The PCE index, the Federal Reserve’s preferred inflation gauge, rose 0.2% as did the core rate that strips out food and energy. The rate of inflation over the past 12 months rose to 2.3%, the fastest pace since March 2012. The core inflation rate hit 2%, the Fed’s long-run target, for the first time since April 2012.
Consumer spending rose 0.2% in May after a 0.5% gain in April. Economists surveyed by MarketWatch had predicted a 0.6% increase.
Personal income rose 0.4% after a 0.2% gain in the prior month.
What happened: Consumer spending was held down in May by weak auto sales but has been strong in the second quarter, helped by the recent tax-code overhaul. Disposable personal income rose 0.4%, the largest gain since January. The savings rate edged up to 3.2% from 3%.
Big picture: Economists had expected inflation to hit the Fed’s 2% target but not until later this summer. Fed Chairman Jerome Powell welcomed the pickup in inflation at his last press conference and said that inflation may rise above the 2% target over the next few months given higher oil prices.
The Fed is picking up the pace of interest rate hikes – it is now penciling in four increases this year, up from three in March. If inflation moves persistently above target, the central bank may have to accelerate the pace of hikes. But, for now, Fed officials see inflation remaining around 2%.
Market reaction: Stocks were set to open higher on Friday. There was little reaction to the data in the bond market. The yield on the 10-year Treasury note was down 0.1 basis point at 2.845%.