Fed Sees Stepped-Up Inflation Trend in Spring

The Federal Reserve's latest monetary policy report to Congress has revealed a stepped-up inflation trend in the spring of this year. Measures of consumer price changes began trending up last year and accelerated further this spring, with headline PCE inflation rising to 4.1% in May from 2.5% a year earlier.

The Fed attributes the increase to a combination of factors, including tariffs, energy shocks following the Middle East conflict, and strong demand for high-tech equipment associated with artificial intelligence. Energy prices rose by 24% from a year earlier, but this is not solely an oil story. Core goods inflation accelerated to 2.4% from 0.6%, while prices for computers, software, and electronics were pushed higher by demand for semiconductors and data-centre infrastructure.

The report also notes that the economy remains solid, but with underlying details less impressive than the overall growth rate. GDP grew at a 2.1% annualized pace in the first quarter, while private domestic final purchases rose only 1.7%. Consumer spending slowed further to a 1.3% annualized pace through the first five months of the year.

The Fed is concerned about the economy's narrow growth engine, which is currently reliant on AI investment and productivity growth. The report identifies four pressures: slower wage growth, much lower immigration and population growth, higher prices resulting from tariffs, and elevated gasoline prices.