Price pressures have stayed relatively muted in recent months, surprising economists and policymakers who expected U.S. inflation to have flared up by now because of President Trump’s tariffs. New data on Friday confirmed that this trend continued in May, but it provided little comfort to those bracing for inflation to reaccelerate this summer.
Consumer prices, as measured by the Federal Reserve’s preferred gauge, rose just 0.1 percent last month even as the Personal Consumption Expenditures price index ticked up slightly to 2.3 percent compared to the same time last year.
That was a step up from April’s 2.1 percent annual pace and brought the 12-month index further from the Fed’s 2 percent target.
“Core” prices, which strips out volatile food and energy costs, also rose 0.2 percent. Compared to the same time last year, that index is now up 2.7 percent.
The data, which was released by the Commerce Department, is being closely watched by the officials at the central bank, who have become increasingly divided over when and by how much to lower interest rates this year.
The fissures stem from differing opinions about how significantly Mr. Trump’s tariffs will stoke inflation and the resilience of the labor market, which has shown signs of cooling.
Last week, the Fed voted unanimously to hold interest rates steady for a fourth straight meeting, despite Mr. Trump’s demands for an immediate and steep reduction in borrowing costs. But projections released alongside the decision as well as more recent commentary from certain policymakers underscored that the path ahead for the economy and the Fed’s policy decisions will be far less straightforward.
According to the projections, most officials still expect the central bank to lower interest rates by half a percentage point this year, or two quarter-point cuts. But seven of the 19 officials estimated no more cuts over the same time period, while two predicted just one quarter-point move. Another two projected 0.75 percentage points’ worth of cuts, or three reductions.
Speaking to lawmakers this week, Jerome H. Powell, the Fed chair, stuck to his longstanding message that the central bank can afford to be patient before cutting interest rates. He noted that the labor market is not yet showing dramatic signs of weakening, and that it is still unclear how Mr. Trump’s policies will affect the economy. The biggest concern is that price pressures will intensify this summer as tariffs begin to show up in a more significant way.
Not all officials are on board with that approach. Two Trump-appointed policymakers have in recent days backed a rate cut as early as July. Governor Christopher J. Waller and Michelle W. Bowman, who was just confirmed to lead regulatory issues at the central bank, downplayed in their latest speeches the impact of tariffs on consumer prices, saying that these levies may not produce as big a boost to inflation as feared.
They also indicated greater concern about the labor market and the risks posed to the economy if the Fed does not offer relief soon.
Mr. Powell this week suggested that the Fed would be flexible in its plans for interest rates depending on how the data evolves. If the labor market started to more noticeably crack or tariff-related price pressures end up less pronounced than feared, that could lead to an earlier reduction in borrowing costs.
Traders in federal funds futures markets wager that the Fed will begin lowering interest rates in September and move at least once more this year.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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