Key US inflation indicator hits 6-year high

A key measure of US inflation hit a six-year high in May, matching the central bank's target, in another sign that price pressures are finally rising, the government reported Friday.

The long-awaited rise in the Personal Consumption Expenditures price index, the Federal Reserve's preferred inflation measure, came amid a slight slowdown in consumer spending last month, according to the Commerce Department.

The weak spending could weigh on GDP growth in the second quarter but incomes posted sharp gains. On an annual basis, the PCE price index hit 2.3 percent, the highest since March 2012.

And excluding the volatile food and fuel components, "core" PCE over 12 months rose two percent, the highest since April 2012 and the first time it has hit the Fed's two percent target in more than six years.

The Federal Reserve has signaled it is comfortable letting inflation run above target for a while to compensate for the extended period of weakness during the current economic recovery.

The US central bank has raised the benchmark lending rate twice so far this year, most recently on June 13.

At that meeting, officials also altered their rate forecasts to include a fourth rate hike in December to keep a lid on mounting inflation. Futures markets on Friday slightly increased their estimated probability of a December rate hike to just over 45 percent, suggesting many investors still feel the Fed might hold fire.

Price increases in May included also strong gains for energy goods and services that were partially offset by falling food prices. The PCE price index rose 0.2 percent compared to April, for both the headline and the core.

Meanwhile, disposable personal income rose 0.4 percent, or $63.2 billion, for the month, the largest gain since January.

But spending rose only 0.2 percent, slowing from the 0.5 percent gain in April. In inflation-adjusted terms, real expenditures fell by less than a tenth of a percentage point.

Spending undershot analyst expectations, held down by consumption of services in the month, which was nevertheless up 4.2 percent over May of last year.