Core PCE rises to 2.7% as spending and income decline
U.S. inflation remained subdued in May, with the personal consumption expenditures (PCE) price index—the Federal Reserve’s preferred gauge—rising just 0.1% for the month and 2.3% year over year, according to the Commerce Department on Friday.
Core PCE, which excludes food and energy, increased 0.2% for the month and 2.7% annually. While slightly above forecasts, the data keeps inflation below early 2024 levels and far from the highs seen during 2022. Economists had expected core readings of 0.1% monthly and 2.6% annually.
Weak income and spending hint at economic slowdown
The report also revealed signs of softening economic momentum. Personal income unexpectedly declined by 0.4%, while consumer spending fell 0.1%, compared to forecasts for 0.3% and 0.1% gains respectively. These figures add to growing concerns about the broader health of the economy as it absorbs ongoing tariff shocks.
“This morning’s news was consistent with other reports showing the economy gradually losing momentum in the second quarter,” said Gary Schlossberg, market strategist at Wells Fargo Investment Institute. He added that the report “keeps hopes alive” for a July rate cut, though he believes it’s still premature.
Trump pressure vs. Fed caution
President Donald Trump has renewed pressure on the Fed to lower interest rates, arguing that inflation is under control and a rate cut is needed to counteract the economic drag of tariffs. Fed Chair Jerome Powell, however, has maintained a cautious stance, calling for more evidence that inflation pressures remain muted before taking action.
Powell has recently faced public criticism from Trump, who called the Fed chief “stupid” and hinted at replacing him soon. Despite political tension, Fed officials remain divided, with some expressing openness to easing policy if inflation continues to soften.
Breakdown of inflation components
Food prices rose 0.2% in May, while energy prices fell 1%, led by a 2.2% drop in gasoline. Shelter costs increased 0.3%, continuing to exert steady pressure on core inflation. Over the past year, services inflation has risen 3.4%, while goods prices are up just 0.1%.
Markets reacted calmly to the report. U.S. stock futures moved higher, while Treasury yields edged up, suggesting investors view the data as supportive of a soft-landing scenario with potential rate cuts later this year.