Consumer prices rose slightly in May, with the personal consumption expenditures (PCE) price index — the Federal Reserve’s preferred inflation gauge — increasing by 0.1% on a seasonally adjusted basis. This nudged the annual inflation rate to 2.3%, aligning with economists’ expectations. Though still above the Fed’s 2% target, the data suggests a modest inflation trajectory. Core PCE, which excludes volatile food and energy prices, climbed 0.2% for the month and 2.7% over the year, slightly above forecasts and April’s reading.
Consumer Spending Weakens as Economic Momentum Slows, Markets Remain Calm Amid Uncertainty
While inflation crept higher, consumer behavior pointed to weakening economic momentum. Consumer spending dipped by 0.1% in May, contrary to predictions of a 0.1% gain. More notably, personal income fell by 0.4%, missing expectations for a 0.3% rise. These indicators reflect a slowing economy, consistent with broader trends in the second quarter, potentially influenced by upcoming tariffs expected to take effect in the summer and early fall.
Inflation Ticks Up in May, But Slowing Spending and Income Signal Weaker Economic OutlookDespite the economic softness, financial markets remained relatively steady. Stock futures opened positively, and Treasury yields rose slightly. Analysts like Gary Schlossberg of Wells Fargo Investment Institute interpreted the data as keeping the possibility of a Federal Reserve rate cut in July alive, though he warned that such expectations may still be premature. Most market participants anticipate the Fed will maintain current rates at its next meeting in late July.
Political Pressure Mounts on Fed as Inflation Remains Sector-Specific and Overall Muted
President Trump continues to pressure the Federal Reserve to lower interest rates, arguing that inflation remains subdued and further rate cuts are justified. He has criticized Fed Chair Jerome Powell, even suggesting he might replace him soon. Despite this political pressure, Powell remains cautious about making any hasty policy changes and continues to advocate a measured approach to managing inflation and economic growth.
May’s inflation data showed muted overall pressures, with contrasting movements in different categories. Food prices rose 0.2%, but energy prices dropped by 1%, including a 2.2% fall in gasoline. Shelter costs increased by 0.3%. The primary driver of inflation remains services, which have risen 3.4% over the past year, while the price of goods has barely changed, increasing by just 0.1%. This dynamic suggests that inflationary pressures are not broad-based but concentrated in specific sectors.
