U.S. PCE Data for May: Inflation Softens Again, Fed May Accelerate Cuts

The U.S. Personal Consumption Expenditures (PCE) inflation report for May 2025 reinforced the market view that inflationary pressures are cooling, increasing the likelihood of earlier interest rate cuts by the Federal Reserve. Core PCE, which excludes food and energy, rose 0.2% month-over-month, higher than expectations of 0.1%, yet still reflecting a broader disinflationary trend. On an annual basis, the core index climbed 2.7%, lower than the prior month and close to the Fed’s long-term target.

Headline PCE: Stability in Focus

Headline PCE, considered the Fed’s preferred inflation measure, increased 0.1% from April—matching market forecasts. Year-over-year, it remained steady at 2.3%, also in line with consensus expectations. These numbers indicate a stabilization of inflation rather than any unexpected reacceleration.

The data aligns with a wider trend of easing inflation seen across other indices such as the Consumer Price Index (CPI) and Producer Price Index (PPI). Specific sectors like services, real estate, and food are showing signs of softening or plateauing prices.

Core vs. Headline: Persistent Gap, but Shrinking

While headline inflation posted a moderate 0.1% gain, the 0.2% rise in core inflation highlights ongoing pricing pressures in non-volatile components such as services. The monthly core increase was higher than expected, reflecting challenges in fully containing inflation. Still, the gap between core and headline inflation has narrowed.

On a yearly basis, core PCE eased from 2.8% to 2.7%, suggesting that the disinflationary process remains intact, albeit at a slower pace than seen in late 2024.

Implications for the Fed: September Rate Cut in Sight?

Given the benign headline numbers and continued easing in core inflation, odds are rising for a rate cut as early as September. Market-derived probabilities now suggest a strong chance of monetary easing in Q3, with some analysts projecting two rate cuts before the end of 2025.

The Fed is likely to await upcoming labor market and wage data before committing to a policy shift, ensuring the inflation downtrend is durable.

What Lies Ahead?

Despite the apparent softening, the Fed is expected to proceed cautiously. Indicators such as average hourly wages, healthcare service costs, and housing metrics continue to show volatility. Nonetheless, the broader inflation rate hovering near 2% sends a reassuring signal of policy control, not a loss of credibility.

Which Companies Stand to Benefit?

Should the Fed initiate rate cuts in the second half of the year, interest-sensitive sectors could gain meaningful upside. Public real estate firms, large-cap tech companies, consumer cyclicals, and credit providers stand to benefit from lower financing costs and improved demand conditions, should the easing cycle begin.