Finally, inflation numbers open up the door for the Federal Reserve to potentially cut rates this September.
The personal consumption expenditures (PCE) price index—the Fed’s preferred measure of inflation—rose 2.6% year-over-year in May, with a change of 0% between May and April. Ultimately, this is the lowest headline and core inflation (excluding volatile food and energy prices) since 2021. Additionally, April data had shown that prices increased slightly at 0.3% month-over-month and 2.7% year-over-year.
“PCE inflation cools and creates a wider path to a September rate cut BUT the Federal Reserve still needs more convincing,” said KPMG Chief Economist Diane Swonk in a post on X (formerly Twitter). “Drop in goods prices helped to cool inflation—some of that was due to stockpiling ahead of tariffs, fears of geopolitical tensions & threat of strikes this summer at U.S. ports.”
May also saw a 0.2% increase in personal consumption spending, reaching $47.8 billion in current-dollar PCE, according to the data released by the U.S. Department of Commerce. This was a reflection of an increase of $34.2 billion in spending for services and a $13.6 billion increase in spending for goods.
Disposable personal incomes rose slightly more, 0.5% or $94 billion in May.
Swonk explained on X that “(t)he hard issue for the Federal Reserve is the stickiness in structural inflation. Insurance costs soared along with health care costs,” which she said is due to increased damages by extreme weather events, aging demographics and burnout among healthcare.
“The Fed needs more of a drop in goods prices to offset those increases. We have a tailwind of retailers rolling back prices & strong dollar but supply chain problems & tariffs could undermine that progress in the second half,” she explained.
Ultimately, the decision to make rate cuts in September has become a legitimate possibility, although more months like May’s PCE and further evidence of a struggling economy may be necessary for the Fed to make that decision.
“Bottom line: Path to September cut has widened. We need to see a lot of months like May PCE and a weakening in the economy for enough evidence for the Fed to feel confident in cutting. That is still a bit of a stretch, which has left us with one rate cut,” Swonk concluded in her thread.
