U.S. inflation has reaccelerated. The May Personal Consumption Expenditures (PCE) price index rose 4.1% from a year earlier — the highest in roughly three years — while core PCE, which strips out volatile food and energy, jumped to 3.4%. On top of that, Neel Kashkari, the Minneapolis Fed president long seen as a dove, flipped his outlook from “one cut this year” to “one hike this year,” all but erasing the market’s remaining hopes for rate cuts.

TL;DR

  • U.S. May PCE inflation came in at 4.1% year over year, the highest since spring 2023 (up from 3.8% in April, re-crossing 4% for the first time in three years).
  • Core PCE hit 3.4%, the highest since October 2023, beating the 3.3% consensus. Middle East–driven oil prices and tariffs — supply-side factors — pushed prices up.
  • Kashkari flipped from “one cut this year” (March) to “one hike this year” (June). Per CME FedWatch, the market leans toward a July hold (~70%) and a September hike (~62%).

What happened?

PCE — the inflation gauge the Federal Reserve trusts most — raised the market’s guard. The May PCE price index rose 4.1% from a year earlier, the highest since spring 2023. That’s up from April’s 3.8% and back above 4% for the first time in three years. Core PCE, excluding food and energy, hit 3.4%, the highest since October 2023 and up 0.3 percentage point from the prior month — also above the 3.3% consensus.

Energy was the biggest force lifting prices. As Middle East tensions intensified, oil and gasoline prices climbed, leaving drivers paying the highest fuel costs in three years. Layered on top were tariff-driven increases in import prices and supply-chain strains tied to instability around the Strait of Hormuz — all “supply-side” factors.

How is the Fed moving?

The notable shift is in the tone of policymakers. Neel Kashkari, the Minneapolis Fed president long classified as accommodative, said at the Aspen Ideas Festival: “In March, I had penciled in one rate cut by the end of the year. In June, I’ve changed that to one rate hike by the end of the year.” He added that he is “concerned about inflation, and it’s not only tied to what’s happening in the Middle East — it’s the impression of broader inflationary pressures in the economy.”

Kashkari framed the price gains as supply-driven: tariffs lifting import prices, and Strait of Hormuz instability stoking energy and commodity costs. As such comments landed, short-dated yields reacted sharply.

How did markets react?

Hopes for rate cuts cooled fast. Per CME FedWatch, a hold is favored at the next meeting in July (about 70%), but the odds of a September hike rose to about 62%. The mood has shifted to no cuts this year and, if anything, a quarter-point hike toward year-end. That weighed on risk assets: the tech-heavy Nasdaq fell for a fifth straight session, as investors took profits and rotated into defensive areas.

What does it mean for Korea?

For Korea, the impact can travel through the currency and export channels. If U.S. rate cuts are pushed back and a hike comes into view, the wider Korea–U.S. rate gap and safe-haven demand tend to strengthen the dollar — raising upward pressure on the won-dollar exchange rate. With the won-dollar rate already lodged in a high range, the burden of an elevated exchange rate could persist. If the exchange rate and oil prices rise together, import prices get stoked, which could weigh on domestic inflation with a lag.

The bottom line

The message from the data and the comments is clear: the “cutting cycle” the market had hoped for has moved further away, and the possibility of an additional hike is now on the table. The crux is that the price gains stem from supply factors like energy and tariffs rather than demand — an area hard to address with monetary policy alone, which only deepens the Fed’s dilemma. Going forward, the path of oil prices tied to the Middle East, the signal from the July FOMC, and next month’s inflation and jobs data will be the key variables steering the rate clock. For Korea — sensitive to the exchange rate and import prices — it’s worth watching U.S. inflation and rate trends all the more closely.

※ This article is for informational purposes only and is not investment advice.

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