U.S. core PCE inflation rose moderately in May, while consumer spending unexpectedly shrank, marking the largest decline since the beginning of the year

According to the Zhitong Finance APP, the PCE price index in the United States rose by 0.1% month-on-month in May, bringing the annual inflation rate to 2.3%. Economists surveyed by Dow Jones predicted corresponding inflation rates of 0.1% and 2.3%. The core PCE price index, which excludes food and energy and is favored by the Federal Reserve, increased by 0.2% month-on-month and 7.7% year-on-year—slightly above expectations but still consistent with moderate inflation.

Although inflation has been relatively mild so far in 2025, many economists expect that inflation will intensify in the coming months as businesses increasingly pass on higher import tariffs to consumers.

After adjusting for inflation, personal consumption expenditures fell by 0.3%. In May, U.S. consumer spending experienced the largest decline since the beginning of the year, indicating that the uncertainty surrounding the Trump administration's economic policies is increasingly negatively impacting the growth outlook. The decline in consumer spending is widespread and aligns with the drop in consumer confidence this year, a phenomenon attributed to President Trump's unstable trade policies.

Weak household consumption demand in May coincides with the worst quarter for consumer spending since the outbreak of the pandemic—this slowdown in consumption may spread to a slowdown in job growth. Spending on automobile purchases fell by 6%, reversing the surge in March and April when consumers rushed to buy vehicles before tariffs took effect.

In May, spending on services remained flat, marking the lowest level in three months. Expenditures in transportation services, dining out, accommodation, financial services, and other services (including net outbound travel) all declined.

Meanwhile, personal income in May saw the largest drop since 2021, due to a reduction in government transfer payments. Wage levels rose by 0.4% for the second consecutive month, continuing a trend of robust growth. This indicates that consumers have enough funds to continue spending. The savings rate fell to 4.5%.

Inflation data indicates that prices of goods excluding food and energy rose by 0.2% in May, slowing from the previous month. Core service prices (a closely watched indicator that excludes housing and energy prices) rose by 0.1% in May after remaining flat in April.

Federal Reserve Chairman Jerome Powell told lawmakers this week that inflation is expected to rise in June, July, and August, as tariff factors will be more reflected in consumer prices. However, he added that if this forecast does not materialize, the Federal Reserve may restore interest rate cuts sooner Two Federal Reserve governors appointed by Trump, Waller and Bowman, stated that if inflation remains subdued, they may support a rate cut at the next policy meeting on July 29-30. The U.S. Bureau of Labor Statistics will release the consumer price data for June on July 15. According to futures markets, investors currently believe that the Fed's next rate cut will occur in September.

After the release of PCE data, market predictions for the Fed's rate cut probability changed little. According to CME's "FedWatch," the probability of the Fed maintaining interest rates in July is 77.3% (down from 79.3%), while the probability of a 25 basis point rate cut is 22.7% (up from 20.7%). The probability of the Fed maintaining interest rates in September is 8.1% (down from 8.2%), while the cumulative probability of a 25 basis point rate cut is 71.6% (down from 73.3%), and the cumulative probability of a 50 basis point rate cut is 20.4% (up from 18.5%).

Overall, Friday's data showed that U.S. consumer spending unexpectedly declined in May, while inflation rose moderately. After the surge in early shopping faded, consumer spending nearly stagnated last quarter. Service spending also decreased, leading to a quarterly increase in consumer spending of only 0.5%, the lowest since the second quarter of 2020. This data suggests a weak growth path for consumption in the second quarter. The combination of weak consumption and moderate inflation is still insufficient to prompt the Fed to restart rate cuts in July. Economists point out that the current moderate inflation is due to companies still hoarding inventory before tariffs take effect, and inflation is expected to rise starting from the June CPI data