🇺🇸 US Core PCE – May 2025 Report: Sticky Inflation, Slowing Demand
Headline Summary:
The Personal Consumption Expenditures (PCE) Price Index rose by 0.1% MoM in May — identical to April. On a YoY basis, headline PCE climbed to 2.3%, slightly higher than last month’s 2.2%, indicating continued inflation pressure.
Core PCE (Excluding Food & Energy):
Core PCE, the Fed’s preferred inflation gauge, increased by 0.2% MoM, beating expectations and April’s 0.1%. Annually, core inflation now stands at 2.7%, up from 2.6%, reinforcing concerns about persistent underlying inflation.
🔍 Why This Matters:
Fed’s Dilemma: With core inflation stuck well above the Fed’s 2% target, a July rate cut looks unlikely. Current policy rates (4.25%–4.50%) may stay unchanged until at least September, unless inflation cools significantly.
Economic Signals: Personal income fell by 0.4%, and consumer spending dipped 0.1%, marking the first decline since January — signs of slowing demand despite sticky prices.
Macro Complexity: The data presents a paradox: rising inflation on one side, softening growth indicators on the other. This puts the Fed in a tough spot, forced to balance price stability with growth protection.
📊 Market Reaction: Despite the mixed inflation data, equity markets pushed higher. The S&P 500 and Nasdaq hit new highs, driven by dovish expectations for late-year cuts. Meanwhile, Treasury yields dipped, reflecting cautious optimism and growing demand for safety assets.
🌐 Context & Outlook: Some analysts attribute price stickiness to tariff pass-through effects, particularly on goods and services. Markets are now pricing in a 75–80% chance of no rate cut in July, with attention shifting to the September FOMC meeting as the likely pivot point.
✅ Bottom Line:
Core PCE at 2.7% signals inflation remains above comfort levels, even as spending momentum weakens. The Fed is expected to remain cautious, prioritizing inflation control over early stimulus.