Howard Schneider and Ann Saphir
5 min read
By Howard Schneider and Ann Saphir
WASHINGTON (Reuters) -An unexpected pickup in underlying inflation last month nudged price pressures further from the Federal Reserve's 2% target, putting this summer's data in the spotlight for whether the central bank can resume cutting interest rates and ease ongoing tension with President Donald Trump.
Friday's Commerce Department data painted a potentially worrisome picture for Fed policymakers. Personal spending and income both dropped in May, a possible sign of weakening economic growth, while core inflation increased at a 2.7% annual rate, faster than in April and higher than anticipated. Overall inflation, used to set the Fed's inflation target, grew more modestly at 2.3%, but still moved away from target, and April's rate was revised higher.
Investors initially keyed on the spending weakness, boosting bets the Fed would cut rates by 75 basis points this year, faster than Fed policymakers project.
With households pulling back after a surge of preemptive buying to avoid Trump's import tariffs, "I think the real worry here is personal income and spending moving lower," said Peter Cardillo, chief market economist at Spartan Capital Securities. "All signs point to a weakening economy."
The report, though, provided little clarity for Fed policymakers worried inflation pressures may build in coming months in response to Trump's import taxes, not all of which are fully set.
"The report is a wash for the FOMC and won't alter its wait-and-see stance," wrote Sal Guatieri, senior economist at BMO Capital Markets. "The slightly warmer core price increase doesn't settle the debate about how much tariffs will impact inflation."
Ahead of their September meeting, Fed officials will receive reports on consumer prices for June, July and August that Fed Chair Jerome Powell this week said should show whether tariffs are flowing through to consumer prices, as many economists anticipate, or whether those concerns prove overblown. In addition, jobs reports for those three months will show whether the labor market remains solid, or whether slowing job growth and rising joblessness offer a different reason to consider cutting rates.
Referring to the Fed's current outlook that inflation is about to rise due to tariffs, Powell in a hearing before the House Financial Services Committee on Tuesday said "we should start to see this over the summer, in the June number and the July number...If we don't we are perfectly open to the idea that the pass-through (to consumers) will be less than we think...That will matter for policy."
