US Q2 Core PCE YoY Growth Rebounds to 3.4% as Expected; Sticky Service Inflation May Delay Rate Cuts

1. Core Overview: According to the latest data, the US core Personal Consumption Expenditures (Core PCE) price index YoY growth rate for May 2026 (Q2 2026) rebounded to 3.4%, higher than the previous reading of 3.3% in April. The performance perfectly met the market consensus expectations and hit a nearly six-month high. If the more volatile food and energy items are included, the nominal PCE YoY growth rate climbed even higher to 4.1%. Overall, the progress of cooling US inflation faces challenges once again, with the data remaining well above the 2% target set by the Federal Reserve (Fed).

2. Key Details: In terms of detailed performance, the strength of service inflation and personal income and outlays became key supports. Real Personal Consumption Expenditures (Real PCE) in May increased by 0.3% MoM, sweeping away the haze of stagnation from the previous month, while personal income showed a robust MoM growth of 0.7%. In addition, impacted by geopolitical conflicts in the Strait of Hormuz, the surge in energy prices, such as gasoline, directly drove up nominal inflation. Meanwhile, in the core data segment, the annualized inflation rate for "core services" heated up significantly, indicating that underlying price pressures remain broad-based even after excluding energy.

3. In-depth Attribution: Regarding this data shift, market institutions generally believe that inflation stickiness primarily stems from the resilience of the labor market and consumer demand. According to analysis by institutions like Seeking Alpha, robust income growth and a personal saving rate maintained at 3.0% provide a buffer for household consumption, enabling businesses to continue passing on costs. Furthermore, reports from FXStreet and CBS News mentioned that although the short-term shocks to the energy supply chain may subside as the strait reopens, the stickiness of the core service sector is precisely the core driving factor forcing the Federal Reserve to consecutively maintain the benchmark interest rate within the 3.50%–3.75% range.

4. Outlook and Risks: Looking ahead, the outlook can be divided into short-term and medium-term perspectives. In the short term (1-2 months), as the Strait of Hormuz gradually resumes navigation, falling oil prices are expected to relieve some pressure on nominal PCE; however, core inflation will remain stubbornly high due to service sector wages and demand, making the probability of the Fed holding rates steady at its next meeting extremely high. In the medium term (3-6 months), if inflation continually fails to move closer to 2%, the Fed's "higher for longer" tightening policy will continue to suppress corporate earnings and labor market expansion. By then, if excess savings are further depleted and the effects of high interest rates materialize, the risk of slowing real economic momentum or even falling into a recession will likely escalate.

5. Web Search Reference Sources:

• Core PCE Inflation At 3.4% In May, Highest Level Since 2023 | Seeking Alpha

• The Fed's preferred inflation gauge shows prices rising at fastest pace in 3 years - CBS News