US Core Inflation Rises, Fed Rate Cut Unlikely Soon

The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, rose to 2.3% year-over-year in May 2025, up from 2.1% in April, remaining above the central bank's 2% target. Core PCE, which excludes food and energy prices, climbed to 2.7% annually, exceeding both economist expectations and April's revised 2.6%. Despite higher inflation, consumer spending declined by 0.1% and personal incomes dropped, reflecting growing financial caution among Americans. Recent tariffs implemented under President Trump have increased costs for some goods but have been partially offset by falling prices in categories like new cars and airline fares. The combination of persistent inflation and weakened consumer metrics reduces the likelihood of an imminent interest rate cut by the Federal Reserve. However, market expectations for a rate cut later in the year have risen, even as Fed officials remain divided on the timing.