Core inflation hits Fed's 2% target for the first time in six years

Getty ImagesConsumer spending rose 0.2% in May.

The numbers: Inflation moved higher in May while consumer spending continued to show strength, the government said Friday. The PCE index, the Federal Reserve's preferred inflation gauge, rose 0.2%, as did the core rate that strips out food and energy. The rate of inflation over the past 12 months rose to 2.3%, the fastest pace since March 2012. The core inflation rate hit 2%, the Fed's long-run target, for the first time since April 2012.

Consumer spending rose 0.2% in May after a 0.5% gain in April. Economists surveyed by MarketWatch had predicted a 0.6% increase.

Personal income rose 0.4% after a 0.2% gain in the prior month.

What happened: Consumer spending was held down in May by weak auto sales but has been strong in the second quarter, helped by the recent tax-code overhaul. Disposable personal income rose 0.4%, the largest gain since January. The savings rate edged up to 3.2% from 3%.

The level of real spending for the second quarter to date is up 2.8% at an annual rate from the first quarter average, a pickup from the 0.9% pace in the first quarter.

Big picture: Economists had expected inflation to hit the Fed's 2% target but not until later this summer. Fed Chairman Jerome Powell welcomed the pickup in inflation at his last press conference and said that inflation may rise above the 2% target over the next few months given higher oil prices.

The Fed is picking up the pace of interest-rate hikes - it is now penciling in four increases in total this year, up from the three projected in March. If inflation moves persistently above target, the central bank may have to accelerate the pace of hikes. But, for now, Fed officials see inflation remaining around 2%.

Read: Fed's Powell to deliver monetary policy report to Senate on July 17

What are they saying: " Core PCE was a bit stronger than expected. It is still tame, with the core PCE series at 2% year-over-year, but that is up from 1.5% year-on-year at year end. [The] momentum is likely still up," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

Market reaction: Stocks DJIA, +0.23% jumped at the open, led by a rally in financial stocks. There was little reaction to the data in the bond market. The yield on the 10-year Treasury note TMUBMUSD10Y, +0.77% was up 0.1 basis point at 2.849%.