Fed eyes summer trajectory as inflation cools, consumption contracts
WASHINGTON: Inflation crept higher in May but showed further signs of deceleration, reinforcing expectations that the Federal Reserve may keep interest rates steady in the near term as it assesses the economy’s slowing momentum.
The personal consumption expenditures price index — the Fed’s preferred inflation gauge — edged up 0.1% for the month, according to Commerce Department data released Friday.
The annual rate slipped to 2.3%, inching closer to the Fed’s 2% target for the first time in over three years.
Core inflation, which strips out volatile food and energy costs, posted a slightly firmer 0.2% monthly increase and climbed to 2.7% on an annual basis. Both measures were modestly above economists’ expectations, but not enough to signal a resurgence in price pressures.
Still, underlying demand showed weakness. Consumer spending dipped 0.1% in May, while personal income fell 0.4%, raising concerns about household resilience heading into the third quarter. Economists had anticipated modest gains for both metrics.
The numbers underscore a cooling economic landscape. They support the Fed’s patient posture while keeping hopes alive for potential easing later this summer—though that window remains highly data-dependent.
While markets priced in little immediate change, attention now shifts to whether the Fed will act at its late July policy meeting. A growing minority of policymakers have expressed willingness to cut rates if inflationary pressures from ongoing trade policies remain subdued.
President Donald Trump has continued to press the central bank for action, arguing inflation is contained and that rate cuts are warranted. But Fed Chair Jerome Powell has maintained a wait-and-see approach, brushing off political pressure in favor of what he describes as “data-driven” policy.
Energy prices pulled back sharply in May, helping to suppress inflation. A 2.2% drop in gasoline costs contributed to a broader 1% decline in energy-related expenditures, offsetting a 0.2% increase in food prices. Services inflation remained elevated, up 3.4% year over year, while goods prices were largely flat.
With tariffs and political uncertainty clouding the outlook, economists say the coming months will be crucial for determining whether consumer demand rebounds—or whether a cautious Fed moves from watchful waiting to accommodative action.