U.S. Inflation Stays Cool in May: Calm Before the Storm?

Inflation Meets Expectations: In May 2025, U.S. inflation aligned closely with forecasts, offering a moment of stability amid economic uncertainty. The Personal Consumption Expenditures (PCE) index, favored by Federal Reserve Chair Jerome Powell for its reliability, rose 0.1% month-over-month, matching both the prior reading and market expectations. Annually, the PCE index edged up to 2.3% from 2.2%, precisely as markets predicted. This steady pace suggests inflation is neither surging nor stalling, but the question remains: is this calm sustainable?

Core Inflation Signals Caution

Excluding volatile food and energy prices, the core PCE index climbed 0.2% in May, slightly above the expected 0.1% and the previous month’s 0.1%. On an annual basis, it rose to 2.7% from 2.6%, meeting market forecasts. This uptick in core inflation hints at persistent price pressures beneath the surface. For instance, a small business owner in California might still feel the pinch of rising supply costs, even as headline inflation appears tame.

Income and Spending Falter

Personal income growth slowed sharply to -0.4% in May, down from 0.7% and worse than the expected 0.3%. Personal spending also weakened, dropping to -0.1% from 0.2%, missing market forecasts of 0.1%. These declines signal consumer caution, potentially dampening economic momentum.

What’s Next for Policy?

With inflation steady but consumer activity cooling, Federal Reserve policymakers face a tightrope. Persistent core inflation may deter rate cuts, while weakening income and spending could prompt action to spur growth. The path forward hinges on whether these trends hold or shift.