Insights 
VT 
Goldman Sachs anticipates a rise in the core Personal Consumption Expenditures (PCE) index by 0.2% in May from 0.1% in April. This would increase the year-over-year core PCE rate to 2.6% from 2.5%, despite a cooler-than-expected Consumer Price Index reading.
The projected increase is due to tariffs implemented by the Trump administration, which are expected to exert upward pressure on inflation. Core PCE inflation could reach 3.5% by the end of 2025, primarily because of these tariffs.
Impact Of Tariffs
Although the immediate tariff impact is seen as a one-time price adjustment, Goldman Sachs warns the effects may intensify in the coming months. The inflationary impact could peak between May and August before subsiding.
Meanwhile, expectations regarding Federal Open Market Committee (FOMC) rate cuts for the year are being adjusted by analysts, as reported by the Wall Street Journal.
Goldman Sachs expects the core PCE index—a key inflation measure used by the US Federal Reserve—to rise by 0.2% for the month of May. That’s up from 0.1% in April. What’s more, this would nudge the annual core reading to 2.6%, slightly higher than the previous 2.5%. This shift comes despite the Consumer Price Index, which showed milder inflation than predicted, suggesting a disconnect between broader price trends and the core PCE.
The increase is mainly attributed to tariff measures brought in under the previous US administration. These duties are still feeding into the system through higher input and production costs. Sachs projects that this could push the core PCE gauge towards 3.5% by the end of next year, with most of the pressure felt over the coming summer months.
They’ve flagged the current inflation bump as more than a one-off. Though it begins with what looks like a single re-pricing event, policymakers will be watching closely for whether businesses continue passing those costs on to consumers. This could mean PCE rates stay elevated longer than some might expect.
Fed Rate Adjustments And Market Reactions
From our perspective, what matters more is the timing of this projected jump. If peak pressure occurs mid-year and softens after August, that could align with a shift in focus from inflation risks to economic resilience. But while that transition plays out, rate-setters at the Fed have less room for manoeuvre—particularly with public calls growing louder for rate adjustments before year-end.
The coverage from the Journal echoed this. Analysts are beginning to shift expectations about how quickly Fed members might act. Lower rate bets are being pushed further down the calendar, while some traders have started to price in fewer possible cuts overall. That re-pricing is filtering across risk assets, and we’re beginning to see it in volatility measures too.
In terms of action, we’ve had to adjust some of our shorter-dated positions. The delay in rate cuts means premiums may remain compressed in the front end, while longer-term implieds could drift upwards as rate uncertainty starts to return. Clarity on the PCE path in June and July will be vital for confirming whether that peak inflation view holds or gets revised again.
It’s useful to look not just at the headline estimates but also at how traders are aligning positions to account for this inflation lift. Moves in major rate-sensitive instruments suggest confidence is being steadily replaced by hedges. That isn’t panic—yet—but it hints that longer monetary tightness is now a base case.
We’ve opted to keep exposure light across macro-heavy dates, particularly where statement language or dot plots could drive sharp repricing. In addition, tariff-related developments—especially any attempts to roll back or escalate—could act as asymmetric catalysts. We’re watching those closely.
Finally, what’s happening behind the headline PCE figures is prompting a rethink among many quant desks and options market participants alike. With implieds signalling a wider range of outcomes than we’ve seen in recent months, the next few prints are set to drive considerable positioning adjustments. Timing and entry matter more than usual.
