Will Inflation Reach the Fed’s 2% Target?
The latest Personal Consumption Expenditures (PCE) report, a key measure of inflation, showed that headline prices in May rose by just 0.1%, bringing the annual rate down to 2.3% — largely in line with expectations.
However, the Federal Reserve tends to focus on Core PCE, which excludes volatile food and energy prices and is considered a better indicator of underlying inflation trends. In May, Core PCE increased 0.2%, slightly above the 0.1% forecast, and now stands at 2.7% year-over-year.
So, how close are we to the Fed’s 2% target?
Getting there may take longer than many hoped — likely not until early 2026. Why? Because inflation is measured on a rolling 12-month basis. Each month, the oldest month’s data drops off and is replaced by the latest reading. The relatively low monthly inflation figures from June–December 2024 (0.1%–0.29%) will soon roll off, making it more difficult for new monthly data to push the annual rate down significantly in the short term.
But the outlook brightens in 2026. Higher inflation readings from early 2025 — like 0.34% in January and 0.48% in February — will then fall out of the calculation. If lower monthly gains replace them, progress toward the 2% target could pick up.
What About Fed Rate Cuts?
The Fed’s mandate is to balance price stability and maximum employment, a delicate task — especially with added economic uncertainties like new tariffs. When inflation stays high, the Fed is less inclined to cut rates. But if signs of a slowing economy emerge, rate cuts may become more likely.
At its June 18 meeting, the Federal Reserve left its benchmark Federal Funds Rate unchanged at 4.25%–4.5%, extending the pause on rate changes that began in January — a widely expected move. This reflects the Fed’s careful approach to managing the dual risks of persistent inflation and rising unemployment.
Looking ahead, the Fed will closely watch upcoming data on inflation and employment to guide its next moves. Their latest projections for 2025 indicate Core PCE could average 3.1%, up from the prior estimate of 2.8%, and unemployment could rise slightly to 4.5%, compared to the current 4.2%.
Despite these revised forecasts, the Fed still anticipates cutting rates twice before the end of this year, signaling cautious optimism that inflation will eventually trend lower while the labor market remains resilient.
For a deeper dive into the data and analysis, see the full article from Highway.ai:
👉 Will Inflation Reach the Fed’s 2% Target?
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