Headline inflation increased to 2.3% in May compared to a year ago and core inflation excluding food and energy prices rose to 2.7%, according to personal consumption expenditures (PCE) price index data released Friday by the U.S. Commerce Department’s Bureau of Economic Analysis.
Those inflation readings represent slight increases compared to April’s upwardly revised overall PCE inflation mark of 2.2% and core inflation reading of 2.5%. Core inflation, which strips out the more volatile food and energy categories, is generally seen as a more accurate indicator of long-term inflation trends.
The 0.1% monthly increase in overall inflation was in line with consensus economist estimates from FactSet, while the 0.2% month-over-month rise in core inflation overshot analysts’ predictions of a 0.1% gain.
While May inflation was slightly hotter than expected, it still leaves the door slightly ajar for a potential Federal Reserve interest rate cut in July.
Interest-rate traders were pricing in about a 20% chance of a July rate cut as of Friday morning, according to the CME FedWatch tool. The futures market sees a quarter-point rate cut in September as far more likely, with additional 0.25% cuts potentially on the docket for October and December.
Tariff impacts
The Commerce Department report revealed a dip in consumer spending in May. Personal consumption expenditures, which measures total spending on goods and services, fell $29.3 billion last month, or 0.1%. Real PCE, which adjusts for inflation, declined 0.3%.
Wells Fargo economists Tim Quinlan and Shannon Grein wrote in an analysis that the May data suggest that “price fatigue is at last settling in,” and “the narrative that the economy can absorb tariffs without any meaningful pass-through to prices took a few hits today.”
“This may be a bit short of a seismic change, but it completely changes the narrative on the health of the consumer and reconciles the head-scratching disparity between plunging confidence and a swaggering consumer unencumbered by tariffs or a weakening labor market,” Quinlan and Grein commented.
The Wells Fargo economists also observed that while “inflation progress remains broadly resilient,” consumer prices of major household appliances rose 4.3% in May, which they say is the second-largest monthly gain on record after the COVID-19 pandemic. They think this underlying data represents “undeniable evidence” of the impacts of tariffs.
“One of the top questions we get these days is ‘When will the tariffs show up in the inflation data?’” Quinlan and Grein noted. They then added: “We are already seeing it, you just need to know where to look.”
