By Wolf Richter for WOLF STREET.
The inflation measure released today for May – the overall PCE price index favored by the Fed as yardstick for its inflation target – re-accelerated month-to-month and year-over-year, despite the steep drop in the components for energy.
The “core” PCE price index, which excludes the food and energy components, also re-accelerated month-to-month and year-over-year.
The year-over-year readings of both the overall PCE price index and the core PCE price index moved further away from the Fed’s 2% target.
There are still no signs in the inflation data that the new tariffs are getting passed to consumers. If that happens in future months, and to whatever extent it might happen, it would add to inflation.
On a year-over-year basis in May:
Overall PCE price index (red): +2.3%, despite the plunging PCE price index for energy. The Fed’s target is 2.0% (purple).
Core PCE price index (blue): +2.7%.
Core Services PCE price index (gold): +3.3%.
Durable goods PCE price index (dotted green): +0.5%, first positive year-over-year reading since May 2023, continuing the bounce-back that started a year ago after the big plunge in 2022 and 2023 (but month over month, the change was 0% in May, indicating that tariffs have not yet been passed on to consumers. The CPI data for May had already pointed that out).
Month-over-month and on a 6-month basis in May:
The overall PCE price index rose by 0.14% (+1.6% annualized) in May from April.
The 6-month PCE price index, which irons out the month-to-month squiggles, accelerated to +2.8% annualized, in May from April.
So far in 2025, the 6-month readings have been in the 2.7% to 3.3% range, a sharp acceleration from the second half of 2024.
The core PCE price index, which excludes food and energy items, accelerated in May to +0.18% (+2.2% annualized).
The 6-month core PCE price index (red) accelerated to +2.9% annualized.
The core services PCE Price Index, which excludes energy services, rose by 0.16% (+1.9% annualized) in May from April.
And April’s freak low reading reported a month ago was revised higher today. That low reading in April was caused by a massive month-to-month negative reading in Financial Services, due to the plunge in the financial markets in April, and a historic cliff-dive in Recreation Services (we discussed this phenomenon at the time).
The month-to-month plunge of the index for Financial Services in April was revised higher today from the originally reported -1.69% (-18.6% annualized) to -1.33% (-14.9% annualized). And for May, both Recreation and Financial Services bounced off their lows.
The 6-month core services PCE price index was essentially unchanged at +3.4%.
Housing inflation has wobbled around in the same range for nearly a year. The PCE price index for housing, based on various rent factors, rose by 0.26% (3.2% annualized) in May from April (blue), about where it had been in June 2024, above November, and below the much higher readings in March and April.
The 6-month housing index (red) rose by 3.9% annualized, for the fourth month in a row in that range.
The year-over-year index decelerated to +4.1% (yellow).
Clearly, rent inflation has ebbed, though it remains slightly above pre-pandemic levels:
Durable goods prices continue zigzagging out of the hole, a trend that started in 2023. Durable goods include motor vehicles, appliances, consumer electronics, furniture, etc. Many of these products or their components and materials are produced overseas and are subjected to new tariffs. So we look at them carefully.
In May, the PCE price index for durable goods was unchanged (0%) from April (blue).
The low point, in terms of the month-to-month declines off the majestic spike came in May 2024 (-8.8% annualized). Since May 2024, month-to-month price drops became smaller, interspersed by ever higher month-to-month increases, and the pattern has been higher. We have discussed this phenomenon here since last August, when used vehicle prices started to rise again.
The six-month PCE price index for durable goods has been slightly positive for four months, and in May accelerated to +1.4% annualized. It had bottomed out in December 2023 at -4.3% annualized.
The plunge in durable goods prices was one of the big factors that drove inflation down from mid-2022 into 2024. Now services inflation has cooled, but durable goods inflation is no longer negative, but slightly positive and as such is still pushing down inflation, but much less so than from mid-2022 into 2024.
This is what the Fed is waiting for: The portion of tariffs that gets successfully passed on to consumers, if any, will be visible in durable goods inflation. Many of these goods are imported and tariffed, or their components are imported and tariffed.
The Fed has said repeatedly that it wants to see to what extent the tariffs add to inflation, and to what extent companies eat them, and they can eat them without indigestion as they piled on record massive profits during the high-inflation years.
If a portion of the tariffs get successfully passed on to consumers and thereby make it into inflation, the Fed wants to see if it leads to just a “one-time bump” in the price level, or triggers persistently higher inflation rates as consumers start tolerating sharply rising prices again.
None of that has happened yet. It all depends on consumers. If they refuse to buy goods whose prices have been jacked up, companies will have a hard time raising prices without gutting their sales and losing market share.
The free money is gone, consumers are once again prudent and no longer willing to pay whatever. Demand growth is tepid. Consumers’ walking away from high prices is exactly why prices of durable goods plunged starting in mid-2022. Consumers have had it with high prices that go even higher. Price increases once again have consequences on sales and market share.
But how consumers will react to price increases remains uncertain. Consumers might once again tolerate bigger price increases, and if they do, inflation will accelerate. And the Fed is right in waiting to find out how this develops.
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