Inflation Keeps Pressure on U.S. Outlook

The Federal Reserve’s preferred inflation gauge rose in May. Headline PCE increased 0.4% from April and 4.1% year-over-year. Core PCE, which excludes food and energy, rose 0.3% month-to-month and 3.4% year-over-year, its highest annual rate since October 2023. Energy costs were higher, linked to disruptions in the Middle East.

The Bureau of Economic Analysis’s third estimate showed real GDP grew at a 2.1% annualized rate in the first quarter of 2026, up from 0.5% in the fourth quarter of 2025 and above a 1.6% forecast. The gain reflected increases in business investment, exports, government spending and consumer spending.

The University of Michigan’s final Consumer Sentiment Index rose 10.5% in June to 49.5, reversing a three-month decline. Moderating gasoline prices contributed to the rise after a recent peace agreement reduced pump costs. One-year inflation expectations fell to 4.6% from 4.8%; five-year expectations dropped to 3.3% from 3.9%. Both remain above pre-pandemic levels.

Equity markets fell after the inflation readings. The S&P 500 closed the week down about 2.0% after its longest daily losing streak since last August. The SPDR S&P 500 ETF Trust fell about 2.2% for the week, while the S&P Equal Weight Index and its ETF posted gains. The 10-year Treasury yield was near 4.38% and the 2-year at about 4.07%.

The CME FedWatch Tool showed roughly a 70% probability the Federal Reserve will hold rates at the late-July meeting and about a 30% chance of a 25 basis-point hike. Futures markets priced a likely hike in September followed by a pause through the end of 2027.

Economic releases scheduled for the coming week include JOLTS job openings for May, the Conference Board consumer confidence index for June, S&P Case-Shiller and FHFA home price indexes for April, regional and national manufacturing PMIs, the ADP employment report for June and the monthly Bureau of Labor Statistics employment report.