The key event of the week is behind us, and it has not brought any unpleasant surprises to the market. As the report showed, the Federal Reserve's preferred measure of inflation came in precisely in line with expectations. The core PCE price index rose by 0.4 percent month-on-month in May, accelerating to 4.1 percent year-on-year, the highest level in several years. The core figure, excluding food and energy, increased by 0.3 percent monthly and 3.4 percent annually. Since these figures were what the consensus had built upon, the threat of a hot surprise that the markets feared after the hawkish pivot did not materialize.

Behind the headline figures lies a clear structure. Of the total increase in consumer spending of $156.1 billion, more than half was directed toward services, but the main inflation driver for the month was once again energy. Spending on gasoline and other energy sources surged by $21.1 billion, making it the second-largest category after financial services. This is a direct legacy of the war with Iran and high oil prices, which remained above $90 in May but have now dropped to around $75. In other words, the May PCE is largely a reflection of the wartime period when the Strait of Hormuz was blocked, and energy was driving prices across the economy.

The picture of incomes and expenditures indicates that the American consumer is still holding up. Personal incomes rose by 0.7 percent, disposable incomes also increased by the same 0.7 percent, while real spending added 0.3 percent. It's important to note a key nuance. A significant portion of the income increase in May can be attributed to a one-time factor, namely, payments to farmers as part of disaster relief programs. Without this support, the income picture would have looked more modest. The savings rate remained low at 3.0 percent, indicating that households continue to spend without building up a safety cushion.

For the new Fed Chair, Kevin Warsh, these data present a convenient, albeit ambiguous backdrop. On the one hand, an inflation rate of 4.1 percent is more than double the central bank's 2 percent target, justifying his hawkish rhetoric at the first meeting and signaling readiness to raise rates. On the other hand, releasing data at the time of the forecast removes the arguments for an urgent tightening. I recall that Treasury Secretary Bessent had previously predicted exactly 4.1 percent for the overall figure and 3.4 percent for the core, and he proved accurate. Bessent insisted that now that the conflict with Iran has been resolved, gasoline prices will fall and inflation will return to target.

Let me remind you that after the signing of the peace memorandum, Brent crude plunged below the pre-war $72 level, while the average gasoline price in the U.S. approached $4 per gallon, compared with the May peak above $4.56. This means that the energy contribution that inflated May's inflation will start to work in the opposite direction in the June and July data. If the disinflationary impulse from cheaper oil solidifies, Warsh will have a basis to refrain from raising rates, even in the face of the disturbingly high headline figure.