The Federal Reserve’s preferred measure of inflation continued to cool while consumer spending grew only moderately, good news for central bankers who have been trying to rein in demand and rein in price increases.
The personal consumption expenditures index rose 2.6 percent in May from a year earlier, matching what economists had forecast and down from 2.7 percent earlier.
After excluding volatile food and fuel prices to give a better sense of the inflation trend, a “core” price gauge also rose 2.6 percent from a year earlier, down from 2.8 percent in April. And on a monthly basis, inflation was especially mild, with prices not rising across the board.
The Federal Reserve is likely to watch new inflation data closely as central bankers think about their next policy steps. Authorities sharply raised interest rates starting in 2022 to curb consumer and business demand, which in turn may help curb price increases. But they have kept borrowing costs steady at 5.3 percent since July 2023 as inflation has slowly fallen, and they have been contemplating when to start lowering interest rates.
While policymakers went into 2024 expecting to make several rate cuts this year, they have pushed back those expectations after inflation proved persistent early in the year. Policymakers have suggested they still think they could make one or two rate cuts before the end of the year, and investors now think the first reduction could come as soon as September.
But whether that happens will depend on what happens with economic data, both in terms of prices and the labour market.
Inflation remains above the Fed’s 2% annual target but is much slower than at its 2022 peak, when headline PCE inflation hit 7.1%. And a separate but related measure, the consumer price index, hit an even higher peak of 9.1% and is now down sharply as well.
Federal Reserve officials have been clear that they will cut rates when inflation has slowed enough to be confident it is fully under control, or if the labor market shows an unexpected cooling.
Policymakers generally expect inflation to cool in the coming months, although some have expressed concern that the process may be stalling.
“Much of the progress on inflation last year was due to supply-side improvements, including the easing of supply chain restrictions; increases in the number of available workers, due in part to immigration; and lower energy prices,” Federal Reserve Governor Michelle Bowman said in a speech this week. She suggested those forces may offer less help going forward.
But other officials are nervously watching a slowdown that is starting to hit the broader economy and could soon hit the labor market, worried that keeping interest rates too high for too long could cost American workers by slowing too much growth.
Hiring has remained strong so far, and while wage growth is cooling, it remains strong. But some measures suggest that working conditions are actually weakening: Job openings have decreased markedly, the unemployment rate has increased slightly, and jobless claims have increased somewhat recently.
“The labor market has adjusted slowly and the unemployment rate has increased only slightly,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in a speech this week. “But we are approaching a point where that benign outcome might be less likely.”
Friday’s report showed consumer spending remained cool in May, further evidence that the economy is losing momentum.
