San Francisco Frontiers - US Fed's preferred inflation gauge picks up as tariff effects loom

The personal consumption expenditures (PCE) price index climbed 2.3 percent last month from a year ago, the Commerce Department said in a report.

This was in line with analyst expectations and a slight acceleration from April's 2.2 percent increase.

But excluding the volatile food and energy sectors, the PCE price index was up 2.7 percent, rising from April's 2.6 percent uptick, the report showed.

But consumer spending declined, after Trump's fresh tariffs in April dragged on consumer sentiment. PCE dropped by 0.1 percent from the preceding month, reversing an earlier rise.

While Trump has imposed sweeping tariffs on most US trading partners since returning to the White House in January -- alongside higher rates on imports of steel, aluminum and autos -- these have had a muted effect so far on inflation.

This is partly because he held off or postponed some of his harshest salvos, while businesses are still running through inventory they stockpiled in anticipation of the levies.

But central bank officials have said they expect to learn more about the impact of tariffs over the summer, meaning they will be scrutinizing data in the coming months.

- 'Clear weakening' -

"The experience of the limited range of tariffs introduced in 2018 suggests that pass-through to consumer prices is intense three-to-six months after their implementation," warned economists Samuel Tombs and Oliver Allen of Pantheon Macroeconomics in a note.

They also flagged weakness in consumer spending, in part due to a pullback in autos after buyers rushed to get ahead of tariffs.

But spending on services was tepid even after excluding volatile components, they said.

"There has also been a clear weakening in discretionary services spending, notably in travel and hospitality," said Michael Pearce, deputy chief US economist at Oxford Economics, in a note.

This reflects "the chilling effect of the plunge in consumer sentiment," he added.

Between April and May, the PCE price index was up 0.1 percent, the Commerce Department report showed.

As a July deadline approaches for higher tariff rates to kick in on dozens of economies, all eyes are also on whether countries can reach lasting trade deals with Washington to ease the effects of tariffs.

For now, despite the slowing in economic growth, Pearce said risks that inflation could increase will keep the Fed on hold with interest rates "until much later in the year."

X.White--SFF