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The Fed's Preferred Inflation Gauge Was Higher Than Expected In May
"Core" PCE inflation rose 2.7% over the year in May, higher than the 2.6% anticipated by forecasters.
Officials at the Federal Reserve use core PCE prices to judge whether inflation is running at the 2% annual rate they target.
Fed officials have debated lowering the central bank's key interest rate, which affects borrowing costs. They have been reluctant to do so this year because of concerns that tariffs will push up rose faster in May than forecasters had anticipated, and consumers unexpectedly lost income and pulled back on spending.
According to a report on Personal Consumption Expenditures by the Bureau of Economic Analysis Friday, "core" consumer prices, which exclude volatile prices for food and energy, rose 2.7% over the year. That is up from an upwardly revised 2.6% annual increase in April and higher than forecasters had expected, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.
The uptick in core PCE inflation is especially significant because it's Federal Reserve officials' preferred inflation benchmark. The central bank sets the nation's monetary policy with the goal of keeping inflation running at 2% a year. Fed policymakers are currently debating whether inflation is tame enough to start cutting the central bank's influential federal funds rate, which affects borrowing costs on all kinds of loans.
PCE prices rose 2.3% over the year when factoring in food and gas, an acceleration from an upwardly revised 2.2% annual increase in April and in line with forecaster expectations. Falling gas prices helped keep PCE inflation relatively cool in May, similar to the CPI inflation measure, a separate report released earlier in the month.
Also of significance for the Fed, consumers pulled back on spending in May as their incomes fell. Consumer spending fell 0.1% month-over-month after rising 0.2% in April. Forecasters had expected spending to rise 0.1%.The spending pullback could be related to President Donald Trump's tariff campaign. Many consumers had bought imported products in March and April in anticipation that tariffs would drive up prices, and subsequently didn't need to buy those things in May, at least one economist said. People have also gotten nervous about the state of the economy, according to consumer surveys, and that may be making some people more cautious about spending.
"What's causing the consumer to slow down? It is likely a range of forces—a pullback from very strong spending and tariff front-running, some worries about the economy due to tariffs and slower population growth all are coming to a head," Ali Jaffery, an economist at CIBC, wrote in a commentary.
Personal income fell 0.4% over the month, the first decrease since September 2021. However, the decline in personal income says more about the quirks of Social Security payments than it does about the economy's trajectory: the drop was related to the Social Security Fairness Act, the bureau said. The Biden-era legislation boosted benefits for some public servants when it went into effect earlier in the year, and gave some people one-time retroactive payments.
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