Inflation Is Heating Up Again—Are Tariffs To Blame?

Inflation picked up again in May, snapping a two-month slowdown, raising fresh concerns that rising tariffs on foreign goods may start to strain U.S. consumers.

The Personal Consumption Expenditures (PCE) price index rose 2.3% in May from a year earlier, matching economists’ expectations and marking a slight uptick from April's upwardly revised 2.2%.

On a monthly basis, the PCE increased 0.1%, in line with consensus and unchanged from April.

Yet, the core PCE index, which strips out volatile food and energy prices and is closely monitored by Fed policymakers as the most reliable inflation metric, accelerated to 2.7% year-over-year from the upwardly revised 2.6% in April, exceeding the economic estimate of 2.6%.

Month-over-month, core PCE climbed 0.2%, doubling April's 0.1% pace and exceeding forecasts.

The uptick in inflation, particularly in the Fed’s favorite gauge, comes amid concern over the Trump administration's new tariff regime, which targets a wide range of imported goods.

Households Cut Back Spending As Incomes Drop

Despite rising inflation pressures, American consumers reduced their spending in May, while personal income experienced a sharp decline.

The Bureau of Economic Analysis reported that personal income fell by 0.4% month-over-month, missing expectations of a 0.3% rise. In April, income had surged 0.7%.

Notably, this marked the first contraction in personal income since September 2021.

Meanwhile, personal spending also contracted by 0.1%, a $29.3 billion decrease, against expectations for a modest 0.1% increase. The pullback in consumption follows a revised 0.2% gain in April.

The biggest hit came in goods, especially vehicles.

Spending on motor vehicles and parts tumbled $49.3 billion, followed by gasoline and other energy goods, which declined $19.8 billion. Spending on food services and accommodations slipped by $10.6 billion.

Market Reactions

Despite the rise in inflation, the U.S. dollar weakened following the data release, pressured by sharper-than-expected declines in income and consumer spending.

Futures on major U.S. equity indexes climbed between 0.3% and 0.4% in Friday's premarket, with both the S&P 500 and Nasdaq 100 poised to extend their record-setting rallies.

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