An inflation measure closely watched by the Federal Reserve held steady in May as elevated prices continue to weigh on millions of Americans. The personal consumption expenditures (PCE) index showed that prices were unchanged from the previous month, according to the Labor Department. On an annual basis, prices climbed 2.6%. Both of those figures are in line with expectations.
In another sign that inflation remains stubbornly high, core prices — which strip out the more volatile measurements of food and energy — climbed 0.1% from the previous month. From a year ago, prices are up 2.6%, the slowest annual rate since March 2021. “The lack of surprise in today’s PCE number is a relief and will be welcomed by the Fed,” said Seema Shah, chief global strategist at Principal Asset Management. “Annual core PCE has now fallen to the lowest level in three years and should provide some comfort that inflation is once again decelerating. However, the policy path is not yet certain.”
While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation. Both the core and headline numbers point to inflation that is still running well above the Fed’s preferred 2% target.
A 0.4% decline in the prices of goods helped to offset a 0.2% increase in the cost of services. Food prices rose 0.1% over the course of May, while energy prices tumbled 2.1%, according to the report.
High inflation has created severe financial pressures for most U.S. households, which are forced to pay more for everyday necessities like food and rent. The burden is disproportionately borne by low-income Americans, whose already-stretched paychecks are heavily affected by price fluctuations.
Other figures included in the report showed that consumer spending increased just 0.2% in May, below both the 0.3% estimate. The lower-than-expected figure suggests that Americans are pulling back on spending as they face steeper prices. Many economists anticipate that spending will slow further in the coming months as consumers continue to grapple with expensive goods, high interest rates, and the resumption of federal student loan payments.
The report comes as Fed policymakers weigh when to start cutting interest rates. Investors have steadily dialed back their expectations as central bank officials signal they are in no rush to cut until they are certain that inflation is conquered. Market pricing currently indicates that the Fed will cut rates twice this year, with the first reduction happening in September, according to the CME Group’s FedWatch tool.
Stock futures moved higher on Friday morning after the report showed that inflation rose in line with expectations last month. An important economic measure for the Federal Reserve showed Friday that inflation during May slowed to its lowest annual rate in more than three years. The core personal consumption expenditures price index increased just a seasonally adjusted 0.1% for the month and was up 2.6% from a year ago, the latter number down 0.2 percentage point from the April level, according to a Commerce Department report.
Both numbers were in line with the Dow Jones estimates. May marked the lowest annual rate since March 2021, which was the first time in this economic cycle that inflation topped the Fed’s 2% target. Including food and energy, headline inflation was flat on the month and also up 2.6% on an annual basis. Those readings also were in line with expectations.
“It is just additional news that monetary policy is working, inflation is gradually cooling,” San Francisco Fed President Mary Daly told CNBC’s Andrew Ross Sorkin during a “Squawk Box” interview. “That’s a relief for businesses and households who’ve been struggling with persistently high inflation. It’s good news for how policy is working.”
The Fed focuses on the PCE inflation reading as opposed to the more widely followed consumer price index from the Labor Department’s Bureau of Labor Statistics. PCE is a broader inflation measure and accounts for changes in consumer behavior, such as substituting their purchases when prices rise. While the central bank officially follows headline PCE, officials generally stress the core reading as a better gauge of longer-term inflation trends.
Outside of the inflation numbers, the Bureau of Economic Analysis report showed that personal income rose 0.5% on the month, stronger than the 0.4% estimate. Consumer spending, however, increased 0.2%, weaker than the 0.3% forecast. Prices were held in check during the month by a 0.4% decline for goods and a 2.1% slide in energy, which offset a 0.2% increase in services and a 0.1% gain for food.
However, housing prices continued to rise, up 0.4% on the month for the fourth straight time. Shelter-related costs have proven stickier than Federal Reserve officials have anticipated and have helped keep the central bank from reducing interest rates as expected this year. Stock market futures were modestly positive following the report while Treasury yields were negative on the session.
Investors have been trying to handicap the Fed’s intentions on rates this year and have had to scale back expectations. Whereas traders earlier in 2024 had been expecting at least six rate cuts this year they are now pricing in just two, starting in September. Fed officials at their June meeting penciled in just one reduction this year.
“The lack of surprise in today’s PCE number is a relief and will be welcomed by the Fed,” said Seema Shah, chief global strategist at Principal Asset Management. “However, the policy path is not yet certain. A further deceleration in inflation, ideally coupled with additional evidence of labor market softening, will be necessary to pave the way for a first rate cut in September.”
The Fed targets 2% inflation and began raising interest rates in March 2022 after a year of dismissing rising prices as transitory effects from the Covid pandemic that likely would fade. The central bank last raised rates in July 2023 after taking its benchmark overnight borrowing level to a range of 5.25%-5.50%, the highest in some 23 years.
Recent economic data has painted a picture of an economy that has withstood the Fed’s aggressive monetary tightening. Gross domestic product rose at a 1.4% annualized rate in the first quarter and is on pace to increase 2.2% in the second quarter, according to the Atlanta Fed. There have been some slight cracks in the labor market lately, with continuing jobless claims hitting their highest level since November 2021. However, the unemployment rate is still 4%, low by historical means though also rising at a slow pace.
A measure of prices that is closely tracked by the Federal Reserve suggests that inflation pressures in the U.S. economy are continuing to ease. Friday’s Commerce Department report showed that consumer prices were flat from April to May, the mildest such performance in more than four years. Measured from a year earlier, prices rose 2.6% last month, slightly less than in April.
Excluding volatile food and energy prices, so-called core inflation rose 0.1% from April to May, the smallest increase since the spring of 2020, when the pandemic erupted and shut down the economy. And compared with a year earlier, core prices were up 2.6% in May, the lowest increase in more than three years. Prices in May held flat month-to-month for the first time since July 2022, according to the Bureau of Labor Statistics.
Prices for physical goods actually fell 0.4% from April to May. Gasoline prices, for example, dropped 3.4%, furniture prices 1%, and the prices of recreational goods and vehicles 1.6%. On the other hand, prices for services, which include items like restaurant meals and airline fares, ticked up 0.2%.
The latest figures will likely be welcomed by the Fed’s policymakers, who have said they need to feel confident that inflation is slowing sustainably toward their 2% target before they’d start cutting interest rates. Rate cuts by the Fed, which most economists think could start in September, would lead eventually to lower borrowing rates for consumers and businesses.
“If the trend we saw this month continues consistently for another two months, the Fed may finally have the confidence necessary for a rate cut in September,” Olu Sonola, head of U.S. economic research at Fitch Ratings, wrote in a research note.
The Fed raised its benchmark rate 11 times in 2022 and 2023 in its drive to curb the worst streak of inflation in four decades. Inflation did cool substantially from its peak in 2022. Still, average prices remain far above where they were before the pandemic, a source of frustration for many Americans and a potential threat to President Joe Biden’s re-election bid.
During Thursday night’s presidential debate, Donald Trump attacked Biden’s record on inflation. The presumptive Republican nominee asserted that Biden inherited low rates of inflation when he entered office in January 2021 but that prices “blew up under his leadership.”
While inflation was in fact ultra-low at the start of the Biden presidency, that was largely because the nation was still recovering from the brutal Covid recession, which flattened the economy. Once the economy began surging back to life with unexpected speed, causing severe shortages of goods and labor, inflation soared.
Friday’s price figures added to signs that inflation pressures are continuing to ease, though more slowly than they did last year. The Fed tends to favor the inflation gauge that the government issued Friday — the personal consumption expenditures price index — over the better-known consumer price index. The PCE index tries to account for changes in how people shop when inflation jumps. It can capture, for example, when consumers switch from pricey national brands to cheaper store brands.
Like the PCE index, the latest consumer price index showed that inflation eased in May for a second straight month. It reinforced hopes that the acceleration of prices that occurred early this year has passed. The much higher borrowing costs that followed the Fed’s rate hikes, which sent its key rate to a 23-year high, were widely expected to tip the nation into recession. Instead, the economy has kept growing, and employers have kept hiring.
Lately, though, the economy’s momentum has appeared to flag, with higher rates seeming to weaken the ability of some consumers to keep spending freely. On Thursday, the government reported that the economy expanded at a 1.4% annual pace from January through March, the slowest quarterly growth since 2022. Consumer spending, the main engine of the economy, grew at a tepid 1.5% annual rate.
Friday’s report also showed that consumer spending and incomes both picked up in May, encouraging signs for the economy. Adjusted for inflation, spending by consumers — the principal driver of the U.S. economy — rose 0.3% last month after having dropped 0.1% in April. After-tax income, also adjusted for inflation, rose 0.5%. That was the biggest gain since September 2020.
Source: Associated Press, CNBC, Fox Business
