Inflation Just Hit a 9-Month High: The Fed’s Favorite Gauge Is Flashing Red Again

The post Inflation Just Hit a 9-Month High: The Fed’s Favorite Gauge Is Flashing Red Again appeared first on 24/7 Wall St..

Rick Santelli stood at the CME this morning with May data and a verdict that should sit uncomfortably with anyone betting on aggressive Fed cuts. “Core PCE in my opinion the most important number expected at 3.4 comes out at 3.4 following a 3.3. And 3.4 would be the warmest going back to october of 23,” he said on CNBC. That is the Fed’s preferred inflation gauge, the one Jerome Powell points to when discussing underlying trend rather than headline noise, and it just printed a nine-month high.

The Bureau of Economic Analysis data confirms the picture. Core PCE rose 3.41% year over year in May 2026, up from a cycle low of 2.75% in October 2025. In seven months the Fed’s favorite gauge has reversed roughly two-thirds of a percentage point in the wrong direction. Headline PCE was worse at 4.07% year over year, juiced by an energy component that surged 4.03% month over month and 24.26% year over year.

The income side looks hot

If inflation were the only data point this morning, the response would be cleaner. Santelli flagged the income beat too. “Personal income for the month of may almost twice expectations comes out up 7/10. Strongest number since january of 24,” he said. And he flagged the GDP revision. “The number is 2.1 and it does increase because we are at 1.6… that would be the best quarter since the third quarter of 25 at 4.4.”

That GDP figure matches what the BEA had penciled in. Q1 2026 real GDP growth came in at 2.1%, with gross private investment contributing 7.9 and government 4.4. The economy is growing, businesses are spending, and household income is accelerating. Capital goods orders confirm the capex story. “Capital goods orders nondefense… 1.6. Wow… the strongest since it was 3.8. And the 3.8 was in march of this year,” Santelli said.

So why are rates rallying

Because the consumer cracked. “Personal consumption, it really gets cut here dramatically… up half of 1%… the weakest going back to the first quarter of 22,” Santelli said. The BEA’s quarterly read tells the same story from a different angle, with personal consumption contributing just 0.5 to Q1 2026 GDP versus 3.5 in Q3 2025. That is the most dramatic component decline in the data.

The savings rate has fallen from 6.2% in Q1 2024 to 3.9% in Q1 2026. Households kept spending through 2025 by saving less. That arithmetic only works for so long. Throw in gasoline outlays running at $552.8 billion in May 2026 versus $401.6 billion a year earlier, and you have a consumer paying more for necessities and pulling back on discretionary items. You can verify the underlying tables on the BEA’s PCE page directly.

What the Fed has to do with all of this

Going into the morning, markets were already trimming cut expectations. Goldman Sachs Research has been calling for a 50 basis point reduction to a 3-3.25% policy rate in 2026, and JPMorgan noted that the market is pricing in roughly 80 basis points of cuts through 2026. Vanguard has been more hawkish, warning that sticky inflation suggests the Fed will have limited scope to cut rates below its estimated neutral rate of 3.5%.

Today’s data pushes that debate sharply toward the hawkish camp on inflation and the dovish camp on growth, a confusing combination. Rates moved lower on the consumption miss, especially at shorter maturities, because traders read consumer weakness as the variable Powell ultimately responds to. Initial jobless claims came in at 215,000, down from 227,000, which complicates the cooling narrative further.

The setup heading into the July meeting is straightforward. Inflation is reaccelerating off a low, the consumer is bending, business investment is doing the work growth needs, and the Fed has to decide which signals it weights.

Watch the June PCE report and the next jobs report. If core PCE keeps drifting from 3.41% toward 3.5% while consumption stays at half a percent, Powell is going to be answering uncomfortable questions about why a cut makes sense at all. You can also see how the data lines up with the SEC filings of consumer-facing retailers reporting later this quarter, where the same softness is starting to show up in guidance.

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