This week’s inflation and labor data suggested easing price pressures. May’s CPI rose just 0.1%, keeping the annual rate at 2.4%, while core CPI—excluding food and energy—slipped to 2.8%, both below forecasts. Producer prices followed suit, with core PPI falling to a 3.0% annual pace. Coupled with a stable 4.2% unemployment rate and modest job growth, the data points to a slow but steady disinflationary trend in core services.
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But rising consumer sentiment may complicate that story. The University of Michigan’s index surged to its highest level since January 2024, and short-term inflation expectations improved. While positive sentiment reflects resilience, it also risks fueling demand-side pressure—especially if supply constraints persist.
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That’s the policy tension confronting the Fed. On June 9, the Atlanta Fed’s GDPNow model projected Q2 real GDP growth at 3.8%, a level inconsistent with recessionary conditions and typically too strong to justify rate cuts. The Fed generally avoids easing policy during robust expansions, as doing so can reignite inflation and overheat the economy. Trump and JD Vance are now calling for a 100-basis-point cut, slamming Chair Powell’s caution as “monetary malpractice.” Markets are betting on a cut by September and more into 2026—but the backdrop complicates that path.
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Adding to the challenge, Brent crude jumped nearly 9% this week amid Israeli-Iranian conflict. JPMorgan now warns oil could spike to $120 if escalation continues. History shows that energy shocks—especially when layered onto strong GDP growth—can quickly reverse disinflation trends and limit the Fed’s room to maneuver.

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