Federal Reserve faces inflation pressures as core PCE inflation hits 2.7%
- Core PCE inflation reached 2.7% in May 2025, remaining above the Fed's 2% target.
- The average effective tariff rate has risen to 15.8%, the highest in decades, affecting consumer prices.
- Federal Reserve remains cautious about adjusting interest rates amid ongoing uncertainty related to tariffs.
In May 2025, the United States experienced a Core Personal Consumption Expenditures (PCE) inflation rate of 2.7%, marking the 51st consecutive month where inflation has remained above the Federal Reserve's target of 2%. According to the latest data released by the Commerce Department, the rise indicates that price pressures continue despite various economic factors at play. The report stated that the core PCE index, which excludes volatile food and energy prices, rose 0.2% since April, aligning with some economists' forecasts, while headline PCE inflation met estimates at 2.3%. The ongoing situation presents a complex picture for policymakers, particularly in light of President Donald Trump's trade tariffs. Economists have noted that while recent inflation data appears mild, there remains uncertainty about the potential long-term impacts of these tariffs on consumer prices. The average effective tariff rate has surged to approximately 15.8%, the highest level since 1936, raising concerns. Although Trump has pulled back on more aggressive trade measures, the existing tariffs could potentially squeeze business margins, leading to higher prices for consumers in the future. Despite these pressures, Federal Reserve Chair Jerome Powell has emphasized a cautious approach to monetary policy. The Fed's ongoing deliberations occur amid calls from Trump to lower interest rates significantly; Powell and other officials have suggested that they need to observe how the economy adapts before making any decisions. The potential for temporary tariff-driven inflation contrasts with the risk of more persistent prices, leaving both the Fed and the Trump administration to navigate the unknowns surrounding trade policy effects on the economy. As the expiration date for the administration's 90-day pause on tariffs approaches, there are further indications of potential extensions for countries negotiating in good faith. The implications of these developments will likely affect the trajectory of inflation and economic growth as stakeholders await further clarity on trade negotiations between the U.S. and other nations, including Canada and the United Kingdom.