The Fed's «favorite indicator» of inflation came in above forecasts in May. What will happen to the rate

The Core PCE index, which the Federal Reserve follows particularly closely when deciding on the interest rate, added 0.2% in May compared to the previous month, and in annual terms reached 2.7%. Both results were higher than economists' forecasts. At the same time, personal consumer spending of Americans unexpectedly decreased, while it was expected to rise. There was no negative market reaction to the new data: the leading indices continued to grow, and S&P 500 and Nasdaq Composite even updated records. At the same time, expectations for a rate cut at the next Fed meeting increased;

The Core Personal Consumption Expenditures (Core PCE) index, which does not take into account volatile food and energy prices and is therefore the US Federal Reserve's preferred inflation indicator, accelerated by 0.2% in May compared to April. That was worse than economists had forecast - they had expected the same gain as a month earlier, 0.1%. The Core PCE has now increased 2.7% over the past 12 months, compared to the 2.6% expected, CNBC reports.

The Personal Consumption Expenditures (PCE) index added 0.1% year-on-year and 2.3% year-on-year - compared to 2.1% in April and the Fed's target of 2%. This value coincided with analysts' estimates, notes CNBC with reference to the Dow Jones data.

The report also showed signs of weakening in consumer spending, which accounts for more than two-thirds of economic activity - unexpectedly for Wall Street, it fell 0.1%, while economists had predicted a 0.1% rise. It was the lowest since the beginning of the year, emphasizes Bloomberg. Americans' personal income also fell 0.4% in May, contrary to forecasts, compared with a 0.8% rise in April, showing the biggest drop since 2021.  

Despite the elevated Core PCE, Reuters called the inflation data moderate and noted that the favorable report reinforced hopes for a «dovish» outlook for US Federal Reserve policy this year. Leading U.S. stock indexes showed no negative reaction, but rather continuedup, also supported by expectations of a trade deal with China. The S&P 500 and Nasdaq Composite added 0.4-0.5%, breaking records, while the Dow Jones climbed 0.9%. 

The report came as the Fed is discussing its next rate action, after leaving it unchanged for the fourth straight time in June but forecasting two more cuts this year. 

The slowdown in consumer spending in May added to worries about the state of the economy: high uncertainty over the Trump administration's course, especially in trade policy, is increasingly weighing on GDP growth expectations, Bloomberg adds. The decline in spending affected a wide range of categories and coincided with the drop in consumer sentiment seen throughout the year - including due to Trump's abrupt and unpredictable moves.

«Fresh statistics confirm the overall picture - the economy is gradually losing momentum in the second quarter, even before the main effect of the new duties becomes apparent in the summer and fall,» noted Wells Fargo Investment Institute market strategist Gary Schlossberg in a CNBC story.

While inflation remains subdued in 2025, a growing number of economists expect it to accelerate in the coming months as businesses begin to pass on the cost of duties to consumers. Fed Chairman Jerome Powell this week confirmed that he expects inflation to accelerate in the summer as the effects of duties gradually begin to show up in consumer prices. At the same time, he noted that if that doesn't happen, the Fed could return to easing policy sooner. Trump-appointed Fed Board of Governors members Christopher Waller and Michelle Bowman also said they are ready to support a rate cut as early as the next meeting on July 29-30 if inflationary pressures remain weak. However, most Fed officials, including Powell himself, have so far come outagainst such a move in July. The U.S. Labor Department will release its first estimate of consumer inflation for June on July 15.

«The slightly firmer core PCE index looks hawkish against softer CPI and PPI (consumer and producer price indices - Oninvest) data released earlier this month. But the overall inflation picture is not changing significantly, and the Fed would likely have already started cutting rates were it not for duty risks,» said a note from analysts at Vital Knowledge, its reported investing.com.

According to CME FedWatch, a tool for monitoring market expectations for the U.S. Federal Reserve rate, traders have raised their expectations for a rate cut in July, with 20.7% now counting on it, up from 5% after the April inflation report and 18.6% after Paeull's speech on Wednesday, June 25. The rest assume that the rate will remain at the same level at the end of the next meeting. 

This article was AI-translated and verified by a human editor