Topline
Inflation inched up more than expected last month, according to Commerce Department data released Friday morning, as Wall Street watches inflation data with bated breath amid the standoff between the White House and the Federal Reserve over the unknown effects of President Donald Trump’s tariffs.
It’s the 51st consecutive month of above 2% inflation, according to the Fed’s preferred core PCE ... More
Annual inflation was 2.7% in May, according to the core personal consumption expenditures (PCE) price index, the Fed’s favored measure of price changes as it excludes the volatile food and energy categories and arguably accounts for consumer behavior more precisely than its sister consumer price index.
Consensus economist forecasts called for core PCE inflation of 2.6% last month, according to FactSet data.
Core inflation remained above the Fed’s 2% goal for the 51st consecutive month, though it is far below the 40-year high of nearly 6% set in 2022.
Headline PCE inflation was 2.3%, meeting estimates of 2.3%.
Even after Trump backed away from his most hawkish trade measures, the average effective tariff rate is still at its highest level since 1936, at an estimated 15.8%, according to Yale University’s Budget Lab. That’s a more than sevenfold increase from 2024’s 2.2% average import tax. But despite economist warnings, recent inflation data has thus far shown little evidence of a significant tariff-driven surge, and May CPI data was milder than economists expected. The prospect of higher inflation even as present data looks mild has led to a staredown between the Fed, which has advocated for a cautious approach on cutting interest rates in case tariffs do worsen inflation, and Trump, who has aggressively called for big cuts.
How tariffs will impact inflation moving forward. Bank of America economists project core PCE inflation to rise to 3.1% by the end of this year, the highest rate since January 2024, because the import taxes will “squeeze margins and force businesses to at least partially pass the tariffs through to consumers,” predicted its group led by Antonio Gabriel. Yet “tariff-driven inflation will be more temporary than persistent,” added the economists, who forecast core PCE inflation will cool to just above 2% by the end of 2026.