Core inflation came in right on forecast in April at 3.3%, staying well above the Fed's 2% target. Wall Street is now betting the central bank's next move is a hike, not a cut.
The shift comes as the personal savings rate hit a three-year low, with spending outpacing flat incomes.
Core PCE - the Fed's favorite inflation gauge - rose 0.2% in April and 3.3% on the year. The monthly number actually came in a touch below the 0.3% estimate.
Headline PCE, which includes food and gas, landed at 3.8% annually.
The pressure showed up in familiar spots, with gas prices jumping 5.5% in the month and housing costs climbing 0.5% - the biggest monthly gain since January 2025.
Core PCE strips out food and energy because those bounce around month to month. The Fed treats it as the cleanest read on where prices are really heading.
That 3.3% reading is nowhere near the 2% target.
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Consumer spending rose 0.5% in April while income stayed flat.
The math only works one way: savings.
The personal savings rate dropped to 2.6% - the lowest reading since June 2022.
This kind of drop usually shows up later as weaker spending or more credit card debt. For now, it's the reason the economy still looks like it's growing.
Earlier this year, inflation was inching back toward the Fed's 2% target. Then the Iran war and tariff hit pushed prices the wrong way.
Traders now expect the Fed to sit on its hands until late 2026. The bigger shift is what they think happens after that: a rate hike, possibly in early 2027.
New Fed Chair Kevin Warsh has signaled he'd rather cut rates. The rest of the committee is leaning the other way, with officials putting more weight on the inflation risk as the job market levels out.
Q1 GDP was just revised down to 1.6%, from the initial 2% estimate. The cut came from softer consumer spending and investment than first reported.
Durable goods orders soared 7.9% in April, but most of that was aircraft. Strip transportation out and orders rose just 1.1%.
Together, the data points to an economy running on a shrinking savings cushion while inflation stays stuck above target.
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