Editor
In May, the core inflation rate in the U.S. unexpectedly rose to 2.7%. This surprised many economists and sparked new discussions about when the Federal Reserve might change interest rates.
Unexpected Bump in Core Prices
On Friday, the Commerce Department shared some new data showing that the personal consumption expenditures (PCE) price index, which the Federal Reserve closely monitors for inflation, increased by just 0.1% in May. However, if we exclude the often fluctuating prices of food and energy, the core inflation actually went up by 0.2%. This change raised the annual core inflation rate to 2.7%, which is higher than April’s rate of 2.6% and well above the Fed’s desired 2% target.
Linda Morales, a senior economist at Horizon Macro Research, pointed out that this isn’t the kind of news the Fed wanted right before summer. They were hoping that core inflation would start decreasing as consumer spending slowed down, but it seems that prices for services are stubbornly sticking around.
Consumer Spending Falters
There’s a bit of good news: Americans are starting to be more careful with their money. In May, personal spending went down by 0.1%, which caught many experts off guard since they were expecting a slight increase. At the same time, personal incomes dropped by 0.4%, marking the largest decline in over a year.
David Chen, a consumer trends analyst at MarketScope Advisors, pointed out that families are feeling the pinch. While lower energy prices provide some relief, rising costs for housing and services are taking away that benefit. Gas prices did fall by more than 2% in May, helping to keep overall inflation steady, but the costs for services like rent and healthcare have gone up by 3.4% compared to last year. Goods prices have barely changed, increasing just 0.1% annually.
Fed Caught in the Middle
We find ourselves in a tricky situation with the current data for the Federal Reserve. Chair Jerome Powell and the rest of the board are meeting again in late July, and Wall Street is really hoping for a rate cut to help boost the slowing economy. However, persistent core inflation might prevent them from taking that step.
Gary Schlossberg, a strategist at Wells Fargo Investment Institute, believes that while the latest figures make a rate cut possible, it’s still a tight squeeze. He mentions, “If inflation were more manageable, we’d definitely be discussing easing right now.” The Fed can’t afford to cut rates too early, risking a resurgence in inflation.
To complicate matters, President Trump has been increasingly critical of Powell, even calling him “stupid” this week. He’s suggested that he might seek a new Fed chair if we don’t see rate cuts soon.
Markets Take It in Stride
Even with some uncertainty, the markets didn’t seem too worried about the recent report. Futures indicate a strong start for Wall Street, and Treasury yields are nudging up, suggesting that traders think the Fed will take its time. Right now, it looks like the U.S. economy is still dealing with effects from pandemic aid, supply chain issues, and new tariffs, which could complicate things down the line.
Looking Ahead
Many experts believe the upcoming inflation reports are really important. If core inflation remains higher than the target while economic growth slows down, the Federal Reserve might have to decide between tackling inflation or supporting the economy, which is a tough choice for any central banker. Morales pointed out that having persistent inflation alongside weaker spending is a challenging situation. It seems the path back to a 2% inflation rate is going to be harder than expected.
