The US Federal Reserve’s favored inflation measure cooled in May, leading to mildly encouraging news that could give policymakers confidence that inflation is still moderating – albeit progress remains slow.
Although inflation has come down significantly overall in recent months, Fed officials have been keeping a close eye on the “core” measure of the Personal Consumption Spending Index, which drives down food and gas costs and they think gives a better signal of how things are moving Price increases could impact in the coming months and years. This measure remained stuck at an elevated level and was only hesitantly lowered.
Sentiment weakened in May, albeit not drastically. Prices rose 4.6 percent year-on-year, excluding food and fuel. In comparison, a 4.7 percent increase was forecast, which would have been in line with the previous month.
Core inflation has been hovering between 4.6 and 4.7 percent since December 2022, down from its peak of 5.4 percent last year but still well above the Fed’s inflation target of 2 percent. Its persistence is a concern for policymakers, who have spent more than a year raising interest rates in a bid to curb rapid inflation.
Progress in tackling headline inflation has been faster and more encouraging. The personal consumption spending index, which includes groceries and gasoline, rose 3.8 percent for the year to May, according to economists’ forecasts — and was below 4 percent for the first time since April 2021. That figure peaked last summer at around 7 percent.
More moderate headline inflation takes some of the pressure off consumers: Cheaper gas tanks and slower price increases on the grocery shelf are helping paychecks keep rising. But signs that inflation was stubborn beneath the surface were a concern for Fed officials. Officials believe they need to cut core inflation to ensure the future of the economy is one of modest and steady inflation.
To achieve this, Fed policymakers have raised interest rates. When it becomes more expensive to get a home loan or to expand a business, the dynamism of the economy is constrained. By slowing growth and cooling demand, the measures aim to make it harder for companies to raise prices without losing customers.
Policymakers refrained from raising rates at their June meeting after 10 consecutive moves, but have signaled they expect to raise rates above their current level of just over 5 percent – possibly to 5.5 percent by year-end . Investors have bet on just one more rate hike this year, but increasingly see two rate hikes as a possibility.
Fed Chair Jerome H. Powell stressed at an event in Madrid this week that the prospects for further interest rate moves this year are uncertain.
“We’ve all seen time and again that inflation is longer and stronger than expected,” Powell said. “At some point that may change. And I think we have to be willing to track the data and have a little patience while we let that happen.”