The personal consumption expenditures price index, or the PCE, inched higher in May, the latest sign that inflation remains stubbornly above the Federal Reserve’s 2% annual target.
Prices rose 2.3% in May compared with a year ago, up from just 2.1% in April, according to the PCE data. Excluding the volatile food and energy categories, core prices rose 2.7% from a year earlier, up from a rate of 2.5% the previous month.
While inflation ticked higher, prices across the U.S. haven’t yet shown a major impact from the Trump administration’s tariffs. Federal Reserve Chair Jerome Powell cautioned earlier this week that inflation could reignite this summer as the import duties are passed through to consumers.
Consumers also pared their spending last month, marking their first reduction since January, while incomes also dropped, the Commerce Department said on Friday. The pullback in spending, which dropped 0.1% last month, comes after Americans opened their wallets earlier in the year to buy goods before the tariffs took effect, economists said.
“While the spending numbers fell slightly and came in below expectations, we would not read too much into these numbers as this weakness is probably primarily just payback from the jump in spending earlier this year as consumers tried to buy goods ahead of the tariffs,” Greg Wilensky, head of U.S. fixed income and portfolio manager at Janus Henderson, said in an email.
Incomes dropped after a one-time adjustment to Social Security benefits had boosted payments in March and April. Social Security payments were raised for some retirees who had worked for state and local governments due to the Social Security Fairness Act.
Modest impact from tariffs
The inflation figures suggest that President Trump’s broad-based tariffs are still having only a modest effect on prices. The cost of some goods, such as toys and sporting goods, have risen, but those increases have been partly offset by falling prices for new cars, airline fares and apartment rentals, among other items.
On a monthly basis, in fact, inflation was mostly tame. Prices rose just 0.1% in May from April, according to the Commerce Department, the same as the previous month. Core prices climbed 0.2% in May, more than economists expected and above last month’s 0.1%.
Economists point to several reasons why Trump’s tariffs have yet to accelerate the pace of inflation, as many analysts had expected. Like American consumers, companies imported billions of dollars of goods in the spring before the duties kicked in, and many items currently on store shelves were imported without paying higher levies.
Some businesses are also absorbing higher import costs, cushioning consumers from price hikes.
“For the moment, there is nothing of consequence to worry about on the inflation side of this report,” Carl Weinberg, chief economist at High Frequency Economics, told clients in a research note. “There is, however, an unexpected drop in consumer spending, the first since the pandemic. That is something to think about. The Fed will make note of this report.”
contributed to this report.
