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Federal Reserve’s Preferred PCE Inflation Ticks Up Slightly
People shop for groceries at a store in Mount Laurel, N.J., on Feb. 5, 2025.
Core inflation, a gauge that removes food and prices, came in higher than expected.
The Federal Reserve’s preferred inflation measure rose in May, a reading that could influence the U.S. central bank’s timing of interest rate cuts.
From April to May, the PCE price index edged up by 0.1 percent.
Both readings were in line with economists’ expectations.
Core PCE inflation, which strips out the volatile energy and food components, jumped to 2.7 percent in the 12 months ending in May, higher than the consensus forecast of 2.6 percent. April core PCE inflation was adjusted slightly higher to 2.6 percent.
On a monthly basis, core PCE rose at a higher-than-expected pace of 0.2 percent.
The Fed places more weight on PCE than the consumer price index because it covers a broader range of items and is updated more frequently.
Meanwhile, according to the Bureau of Economic Analysis, personal income declined by 0.4 percent following a revised 0.7 percent increase in the previous month. The drop in current-dollar personal income was partly driven by a 2.3 percent decrease in government benefit payments.
Personal spending also dipped by 0.1 percent following April’s 0.2 percent rise.
Inflation Is Coming, the Fed Says
While inflationary pressures have not intensified, policymakers predict that higher tariffs will lead to higher inflation this summer.
Appearing on Capitol Hill this week, Fed Chair Jerome Powell stated that the country should examine in the June and July data whether levies are triggering higher inflation.
“If we don’t we are perfectly open to the idea that the pass-through [to consumers] will be less than we think, and if we do, that will matter for policy,” Powell told lawmakers.
“We’re just trying to be careful and cautious,” the central bank chief stated. “We really think that’s the best thing we can do for the people that we serve.”
His main fear is that if the Fed lowers interest rates as the inflation flame is rekindled, then it would force the institution to backpedal. “If we make a mistake, people will pay the cost for a long time,” Powell said.
Officials within the Federal Reserve are debating whether inflation will resurface due to the president’s sweeping global tariffs.
In a speech to the New York Association for Business Economics on June 26, Barkin stated that businesses are telling him that they are passing tariff-related costs onto their customers. Even non-tariff businesses are raising prices “under the cover of what they perceive to be a more inflationary context.”
According to Cleveland Fed President Beth Hammack, there is no need to hurry in restarting the rate-cutting cycle that began in September 2024 and paused in January.
“Given the resilience of the economy thus far, the risks from maintaining the current policy setting appear low, and I don’t see a weakening in the economy that would merit imminent rate cuts, though I remain attentive to that possibility,” Hammack, who is not a voting member on the Federal Open Market Committee, stated.
Two key central bank officials—Fed Gov. Christopher Waller and Fed Vice Chair for Supervision Michelle Bowman—have expressed support for lowering interest rates as early as July.
“It is time to consider adjusting the policy rate,” Bowman said. “Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market.”
“Actual inflation data indicate renewed progress toward our inflation target,” Kashkari said.
“If we were to cut in September and then the effects of tariffs showed up this fall, I believe we should not be on a preset easing course. If the data called for it, we could hold the policy rate at the new level until we gained greater confidence that inflation was headed back to our target.”
‘Smaller Impact’
Consumer, business, and trade inflation reports indicate that tariffs have yet to be reflected in the hard economic data.
David Mericle, the chief U.S. economist at Goldman Sachs Research, determined that the White House’s tariffs could prove to generate a smaller effect on the broader economy than initially believed.
“Inflation readings, while offering only limited evidence at this point, suggest a slightly smaller impact on consumer prices and therefore on real income and consumer spending than was estimated earlier,” Mericle said in a note emailed to The Epoch Times.
“Measures of trade policy uncertainty have moderated a little as the U.S. and its trade partners take steps toward de-escalation.”
In addition, Goldman economists raised their GDP forecast for the fourth quarter of 2025 to 1.25 percent from 1 percent. They also lowered their unemployment estimate to 4.4 percent from 4.5 percent.
The odds of a recession over the next 12 months, meanwhile, have declined to 30 percent from 35 percent.
It takes time for higher tariff-driven costs to be passed through the marketplace, whether to importers or retailers, but the latest numbers show that rising levies have yet to reach the consumer, says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group
Consumers’ inflation expectations have moderated.