The Federal Reserve's preferred measure of inflation, the personal consumption expenditures (PCE) core deflator, advanced by 0.1% (0.113%) in May, below expectations and contributing to a year-over-year change of 2.1% (2.139%), according to a report released from the Commerce Department on Friday morning.

Markets had been expecting a 0.2% monthly gain in core PCE following the previous month's expected 0.1% rise. Annual core PCE remains one tick above the Fed's unofficial target level of 2.0%.

Prior to the release, economists from TD Securities such a modest inflation reading of 2.1% will "come as some comfort to the Fed," and suggests that the underlying consumer inflation pressures have "remained relatively contained."



The report also showed a 1.9% month-over-month increase in personal income in May, higher than expectations and well above the previous month's upwardly revised 0.3% gain.

Personal spending rose 0.8%, above the previous month's upwardly revised 0.4% increase.

Compensation rose 0.3% after a flat reading in April, with wages and salaries gaining 0.3% after a 0.1% drop in April.

Disposable income increased 5.7% following a 0.4% gain in April.

The report also recorded a 5.0% increase in the savings rate, well above the previous month's 0.4%.

Total consumer spending, which comprises roughly 70% of U.S. gross domestic product, rose by 3.2% on an annualized three-month basis.

The PCE deflator came in at 3.1%, slightly below expectations for a 3.2% rise.

The rise in consumer spending was largely expected by economists, who said the rise was largely due to the nearly $71 billion in stimulus cheques the U.S. government has already mailed out to Americans.

By Stephen Huebl