The Federal Reserve’s inflation fight hit another bump in May as prices continued their stubborn march away from the central bank’s target. Core inflation rose to 2.7%. Personal income fell. Consumer spending dropped.
Not exactly the news Fed officials wanted to see.
The Commerce Department released its monthly inflation report Friday, showing the personal consumption expenditures price index climbed 0.1% in May. That pushed the annual rate to 2.3%. Both numbers matched what economists expected.
But core inflation tells a different story. Strip out volatile food and energy costs, and prices jumped 0.2% for the month. The annual core rate hit 2.7% – higher than the 2.6% forecast and up from April’s 2.6%.
That’s moving in the wrong direction. The Fed wants inflation at 2%. Period. They haven’t seen that level since early 2021.
Meanwhile, consumers are pulling back. Personal spending fell 0.1% in May when economists thought it would rise 0.1%. Personal income dropped 0.4% – a sharp miss from the expected 0.3% gain.
The economy is losing steam. Fast.
“This morning’s news was consistent with other reports showing the economy gradually losing momentum in the second quarter, ahead of the brunt of tariff increases expected to wash ashore during the summer and early fall,” said Gary Schlossberg, market strategist at the Wells Fargo Investment Institute.
Wall Street barely blinked. Stock market futures pointed to a positive open. Treasury yields ticked higher. Markets are betting the Fed stays put at their July meeting.
Some Fed officials think differently. A few have been pushing for rate cuts, especially if Trump’s tariffs don’t spark major inflation. The president has been pressuring the central bank to cut rates, arguing inflation is already low enough.
Fed Chair Jerome Powell isn’t buying it. He wants to move carefully. That approach has drawn fierce criticism from Donald Trump, who called Powell “stupid” this week and hinted at naming a replacement soon.
The inflation details show mixed signals. Food prices rose 0.2% in May. Energy costs fell 1%. Gas prices dropped 2.2%. Shelter costs – a huge chunk of most budgets – climbed 0.3%.
Services remain the problem child. They’re up 3.4% year-over-year. Goods prices have barely budged, rising just 0.1% annually.
Schlossberg thinks the data “keeps hopes alive” for a July rate cut. But he calls such expectations “premature.”
The Fed faces a tricky balancing act. Inflation remains above target. The economy is slowing. Trump’s tariffs could complicate everything. Political pressure is mounting.
Powell and his colleagues will need to thread the needle carefully. Cut too soon and inflation could resurge. Wait too long and the economy might stumble further.
July’s Fed meeting suddenly looks a lot more interesting.
