Core PCE Reignites Inflation Concerns, Complicating Fed’s Path — Evening Brief – 06.27.25 

The Federal Reserve’s preferred inflation gauge—the core Personal Consumption Expenditures (PCE) Price Index—rose 0.2% in May, slightly ahead of the 0.1% consensus and marking a modest acceleration from April’s unrevised 0.1%. On a year-over-year basis, core PCE climbed 2.7%, overshooting expectations for 2.6% and revised upward from the previous month’s 2.5%. The hotter-than-expected print reinforces concerns that progress on disinflation is plateauing, particularly in the context of persistent services inflation and tariff-related input costs. 

This latest inflation data will likely reinforce caution at the Federal Reserve, keeping policymakers hesitant to cut interest rates prematurely. While headline PCE inflation—which includes food and energy—remained more subdued at 2.3% year-over-year, in line with expectations, it too ticked up slightly from April’s revised 2.2%, reflecting broad-based stickiness in pricing pressures. 

More troubling for Fed officials is the simultaneous weakening of the consumer sector. Personal consumption expenditures fell 0.1% in May, underwhelming the consensus for a 0.2% increase, while personal income slipped by 0.4%, well below the expected 0.3% gain. These declines pushed the personal savings rate down to 4.5% from 4.9% in April, raising red flags about the resilience of household balance sheets amid high borrowing costs and real income erosion. 

The interplay between stubborn inflation and softening consumption presents a policy conundrum. If upcoming labor market data begin to show meaningful deterioration, the Fed could face growing pressure to act despite inflation remaining above target. This would bring the central bank closer to a delicate inflection point where both arms of its dual mandate—maximum employment and price stability—begin to weaken concurrently. 

For now, market participants will remain focused on upcoming employment and CPI reports, as the Fed appears firmly in data-dependent mode. Rate cut expectations for July are likely to be further tempered, though a September move remains plausible if disinflation resumes and labor market softness deepens. Treasury yields could stay range-bound in the interim, with front-end rates sensitive to any dovish repricing on macro weakness, while duration demand may grow as investors hedge against downside growth risk.