The Federal Reserve’s preferred inflation gauge rose more than expected in May and the annual rate climbed further above central bankers’ 2% goal, according to government data released Friday.
The personal consumption expenditures price index rose 0.1% for the month, pushing the annual inflation rate to 2.3%, according to the Bureau of Economic Analysis.
Core PCE, which excludes food and energy prices, increased 2.7% from the year before – above analysts’ expectations of a 2.6% rise.
This is generally considered a better indicator of long-term trends since it leaves out two particularly volatile categories.
The core figure rose 0.2% from the month before.
“Friday’s stronger-than-expected PCE is a reversal from the past few months of softening inflation data, and it suggests that higher prices from tariffs may be starting to work their way through the economy,” Robert Ruggirello, chief investment officer at Brave Eagle Wealth Management, said in a note Friday.
That’s bad news for those hoping for an interest rate cut this year.
After its meeting last week, the Fed left interest rates unchanged for the fourth time in a row as policymakers stick to a “wait-and-see” approach on how President Trump’s tariffs will play out.
Trump, meanwhile, has ramped up his attacks on Fed Chairman Jerome Powell as he pushes him to slash rates – calling him a “very average mentally person” with a “low IQ” on Wednesday.
While the majority still lean toward a hold on interest rates, several Fed officials have joined Trump’s call over the past week to ease policy as soon as this fall or even by the central bank’s next meeting in July.
But if Trump’s tariffs start to hit inflation, that rate-cut campaign could fall apart.
“While one month does not make a trend, if we were to see another few months of escalating inflation data, it could push the Federal Reserve to continue its rate cut pause into 2026,” Ruggirello said.
Consumer spending and personal income also weakened in May, according to Friday’s report.
Spending dipped 0.1% last month, below expectations of a 0.1% gain.
Personal income fell 0.4%, missing projections of a 0.3% rise.
The Dow Jones gained 195 points, or 0.5%, after the report’s release by approximately 9:40 a.m. ET, while the S&P 500 and Nasdaq rose 0.3% and 0.4%, respectively.
Consumer price data came in muted last month, seemingly escaping the impact of sweeping tariffs, according to data earlier released by the Bureau of Labor Statistics.
Drops in car and apparel prices helped drive the low readings.
Food prices grew 0.2% while energy dipped 1% thanks to declines in gasoline.
Shelter rose 0.3% from the month before and was the main driver of inflation, according to the government.
