Inflation cooled to 2.6% for the year ending in May, as measured by the gauge favored by the Federal Reserve, down about a tenth of a percentage point from the previous reading.
The slowdown in inflation in the personal consumption expenditures price index reported Friday morning by the Bureau of Economic Analysis is welcome news for President Joe Biden the day after a damaging debate performance. It’s also an encouraging sign for the Fed as it works to quash inflation by keeping interest rates elevated.
The Fed’s target is 2% inflation in the PCE index.
From April to May, inflation was very slightly negative but rounded to 0%, about in line with forecast expectations.
Core PCE inflation, a measure of inflation that strips out volatile energy and food prices, fell to a 2.6% year-over-year rate. That is the lowest such rate since March 2021, just after Biden took office.
Core prices rose just 0.1% on the month.
“This is the lowest monthly core inflation increase that we’ve seen this year, and it furthers the narrative that the disinflationary trend that stalled during the first quarter is back to life again,” said Olu Sonola, Fitch Ratings head of U.S. economic research. Sonola added that core inflation is now below where Fed members had projected it to be at the end of this year.
PCE inflation is charting lower than the consumer price index, which is the most closely watched inflation gauge. The most recent reading of the CPI showed that inflation fell slightly to 3.4% for the year ending in April.
Also this week, consumer confidence in June, as charted by the Conference Board’s consumer confidence index, dropped as people expressed growing pessimism about the short-term prospects for the economy.
Higher interest rates, in addition to woes about inflation, are undoubtedly playing a role in souring consumer sentiment.
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The Fed has been closely watching inflation data and data on the overall economy to assess when it will finally start cutting interest rates. At the start of the year, most economists were expecting several rate cuts in 2024, but recent hotter-than-expected inflation reports have kept pushing back the timing of the first rate cut.
Now, the Fed is thinking there will be one rate cut or perhaps two this year. Investors are a bit more bullish and expect the first cut to come in September, with at least one more cut after that.
