26.06.2026 - Inflation: Who Cares
Yesterday’s inflation print showed the highest reading since October 2023. The core Personal Consumption Expenditures (PCE) Price Index, which excludes food and energy, rose 0.3% in May, lifting the annual rate to 3.4%. Headline PCE inflation accelerated to 4.1% year-on-year, marking its highest level since April 2023.
Despite higher inflation, the US consumer continues to spend. Personal consumption expenditures increased 0.7% during the month, comfortably exceeding expectations and highlighting the resilience of consumer demand. Meanwhile, first-quarter US GDP growth was revised higher to an annualized 2.1%, underlining that the economy remains on solid footing despite elevated interest rates.
Markets:
Equities: US equity futures remained positive following the release, with investors largely shrugging off the stronger inflation data.
Bonds: Treasury yields edged lower as markets slightly reduced the probability of an aggressive tightening cycle, although expectations for a September rate hike remain high.
Commodities: Precious metals traded mixed while oil prices remained broadly stable.
Currencies: The US dollar showed limited reaction following the data release, falling slightly from its recent highs.
My View: Inflation is proving to be far more persistent than many investors had hoped. The latest US inflation data showed another acceleration, with the Federal Reserve's preferred inflation measure reaching its highest level in well over two years.
The report comes just over a week after the Federal Reserve, under its new Chair Kevin Warsh, delivered what markets interpreted as a notably hawkish message on inflation and interest rates.
Markets now largely expect another rate hike in September. However, this expectation is far from being reflected across all asset classes. Equity markets, in particular, continue to behave as if monetary policy will have little impact, with US indices pushing towards new record highs almost daily.
In my view, the Federal Reserve risks falling behind the curve. Inflation has become increasingly broad-based, while resilient consumer spending and stronger economic growth continue to support demand. Delaying further policy tightening increases the risk that second- and third-round inflation effects become more deeply embedded in the economy.
For now, equity investors appear willing to ignore these risks. History shows, however, that markets can remain complacent for longer than expected, until they suddenly are not.
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