Federal Reserve Shows No Sign of Tax-Driven Price Increase

The latest Federal Reserve data indicates that there was no significant tax-driven acceleration in May, suggesting that President Trump’s tariffs haven’t yet pushed consumer prices higher. This is particularly evident in product categories most vulnerable to import taxes.

The core consumer spending (PCE) price index, which excludes the more volatile food and energy sectors, rose by only 0.2% in May. This was a slight uptick from April’s gain of 0.1%, but it remains within a familiar range. Over the year, the rate increased to 2.7%, a small rise from 2.6%, reflecting a consistent plateau over several months.

When considering all categories, headline PCE inflation showed a 0.1% increase, with a yearly rise of 2.3%. These figures, despite warnings from economists, have stayed relatively stable since late last year.

The May statistics support the view that tariffs have not yet translated into higher consumer prices. Durable goods, which are closely linked to international trade, remained flat month-over-month, showing no growth after a 0.5% rise in April. Excluding food and energy, product prices were similarly restrained. Annually, product prices increased by only 0.1%, while durable goods saw a 0.5% rise, still not resulting in negative growth.

These figures imply that the impact of tariffs has not yet filtered into broader consumer price inflation. Notably, energy prices dipped by 1.0% in May, while food prices experienced a slight increase of 0.2%.

When adjusted for inflation, actual personal consumption costs fell by 0.3%. This decline is attributed to a slowdown in consumer activity following a surge earlier in the year. Personal income dropped by 0.4%, largely due to the cessation of one-time government benefits in April.

This data comes as the Federal Reserve contemplates the possibility of cutting interest rates again. While Chairman Jerome Powell stressed the importance of patience, some policymakers—especially those appointed by President Trump—point to weak income growth and inflation in less stable products as reasons for potentially justifying earlier interest rate cuts.

The market’s reaction to this data was minimal. Futures trading still indicates expectations for interest rate cuts by the September meeting, with at least one more anticipated by the end of the year.

If tariffs are to lead to a noticeable increase in consumer prices, economists believe the first signs would likely be evident in sectors like automobiles, electronics, and home appliances. However, the May data does not support this notion. Instead, the Federal Reserve is left addressing an economy where inflation remains subdued and actual revenue growth appears shaky.