The Commerce Department dropped its latest economic report on Friday, and guess what? Consumer prices in May crept up by a measly 0.1%, nudging the annual inflation rate to 2.3%. That’s right, inflation’s moving slower than a sloth on a coffee break, but it’s still inching away from the Federal Reserve’s dream of a tidy 2% target.
The personal consumption expenditures (PCE) price index, the Fed’s favorite inflation yardstick, hit exactly what Dow Jones economists predicted: 0.1% monthly and 2.3% yearly. But the core PCE, which ignores the wild swings of food and energy, climbed 0.2% for the month and 2.7% for the year. Those numbers overshot estimates by a hair, making Fed policymakers stroke their chins over long-term trends.
The Fed’s been chasing that 2% inflation goal since early 2021, like a kid trying to catch a butterfly with a broken net. Meanwhile, consumer spending and income took a tiny tumble. Spending dipped 0.1% against hopes of a 0.1% rise, and personal income slid 0.4% despite forecasts of a 0.3% gain.
Wall Street barely blinked at the news. Stock futures hinted at a cheery open, and Treasury yields perked up. It’s like the market sipped some decaf and decided to stay chill.
Gary Schlossberg from Wells Fargo Investment Institute chimed in, noting the economy’s losing steam in the second quarter. He said tariff hikes, courtesy of President Donald Trump’s trade policies, are looming like uninvited guests at a summer barbecue. These tariffs could push prices up soon, but for now, the economy’s just coasting.
The Fed’s now playing a waiting game with interest rates. Schlossberg thinks talk of a July rate cut is a bit like planning a beach trip during a thunderstorm—optimistic but risky. Most market watchers bet the Fed will keep rates steady at their late July meeting.
A few Fed officials, however, are whispering about a rate cut if tariff-driven inflation stays quiet. Trump’s been shouting from the rooftops, or rather Truth Social, for the Fed to loosen up. He claims inflation’s under control and the Fed can always pivot if prices spike.
Fed Chair Jerome Powell, though, isn’t biting. He’s sticking to his cautious playbook, despite Trump’s recent habit of lobbing insults his way. Earlier this week, Trump called Powell “stupid” and hinted at replacing him faster than you can say “central bank drama.”
Inflation in May was mostly tame. Food prices ticked up 0.2%, but energy costs, like gasoline, plunged 2.2%, balancing things out. Shelter prices crept up 0.3%, keeping the inflation pot simmering gently.
Services prices, however, are the real troublemakers, jumping 3.4% and driving most of the inflation pressure. It’s like they’re the loud neighbors at the economic block party. Goods prices, on the other hand, stayed flat, playing the quiet wallflower.
The economy’s showing signs of a slowdown, with consumer spending and income growth hitting the brakes. This could spell trouble if tariffs start jacking up prices. Economists warn that Trump’s trade policies might lead to a stagflationary mess—higher prices with sluggish growth.
Powell’s in a tough spot, balancing the Fed’s dual mandate of stable prices and maximum employment. He’s said the Fed will watch how tariffs play out before making any big moves. It’s like he’s waiting for the economic weather forecast before packing for the policy trip.
Trump’s tariff rollout has been a rollercoaster, with some levies paused and others hitting hard, like a 20% tax on Chinese goods. Economists at JPMorgan are already raising their core PCE inflation forecast to 3.1% for the year, expecting a squeeze on consumer wallets. That could mean less spending and a bumpier economic ride.
Consumer confidence took a hit in March, dropping to its lowest since January 2021, per recent reports. Small businesses are also feeling the jitters, with uncertainty spiking to near-record levels. It’s like everyone’s holding their breath, waiting for the tariff shoe to drop.
The Fed’s independence is under the spotlight, with Trump’s public pressure campaign raising eyebrows. Powell’s made it clear he’s sticking to data-driven decisions, not political noise. The Fed even issued a rare statement in May, doubling down on its nonpartisan stance after a Trump meeting.
For now, the economy’s holding steady, but the tariff threat looms large. If prices keep creeping up, the Fed might have to tighten the screws, risking higher unemployment. Or it could cut rates and pray inflation doesn’t flare up.
As Powell navigates this economic tightrope, Trump’s tweets keep flying. The Fed’s keeping calm, but with tariffs on the horizon, the summer could get hot. Stay tuned for the next economic plot twist.
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