A key economic gauge from the U.S. Federal Reserve showed Friday that inflation slowed to its lowest annual rate in more than three years in May.
The core personal consumption expenditures price index rose a seasonally adjusted 0.1% for the month and was up 2.6% from a year ago, with the latest figure down 0.2 percentage points from April's level, according to the Commerce Department report.
Both figures were in line with Dow Jones estimates. May saw the lowest annual rate since March 2021, marking the first time this economic cycle that inflation has exceeded the Fed’s 2% target.
Excluding food and energy, core inflation remained stable throughout the month and also rose by 2.6% year-on-year. These readings were also in line with expectations.
“It’s just more news that monetary policy is working, that inflation is gradually cooling,” San Francisco Fed President Mary Daly told CNBC’s Andrew Ross Sorkin during an interview on “Squawk Box.” “That’s a relief to businesses and households who have been struggling with persistently high inflation. It’s good news for how policy is working.”
The Fed focuses on reading personal consumption expenditures inflation rather than the widely tracked Consumer Price Index from the Department of Labor's Bureau of Labor Statistics. Personal consumption expenditures (PCE) is a broader measure of inflation and represents changes in consumer behavior, such as replacing purchases when prices rise.
While the central bank officially tracks personal consumption expenditures headlines, officials generally emphasize the core reading as a better gauge of longer-term inflation trends.
Beyond inflation figures, the Bureau of Economic Analysis report showed that personal income rose 0.5% during the month, stronger than the 0.4% estimate. However, consumer spending rose 0.2%, weaker than the 0.3% forecast.
Prices remained under control during the month due to a 0.4% decline in goods and a 2.1% decline in energy, which offset a 0.2% increase in services and a 0.1% increase in food.
Still, home prices continued to rise, rising 0.4% on a monthly basis for the fourth straight month. Housing costs have proven more resilient than Fed officials had expected, helping to prevent the central bank from cutting interest rates as expected this year.
Stock market futures were modestly positive after the report while Treasury yields were negative during the session.
Investors have been trying to derail the Fed's interest rate intentions this year and have been forced to scale back their expectations. While earlier in 2024 traders were anticipating at least six rate cuts this year, they now expect only two, starting in September. Fed officials at their June meeting expected only one cut 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 path of policy is far from certain. Further slowdown in inflation, coupled with further evidence of a weakening labor market, will be needed to pave the way for the first rate cut in September.”
The Fed is targeting 2% inflation and began raising interest rates in March 2022, a year after dismissing rising prices as temporary effects of the Covid pandemic that would likely fade. The central bank last raised rates in July 2023 after raising its benchmark overnight borrowing rate to a range of 5.25%-5.50%, the highest in about 23 years.
Recent economic data has painted a picture of an economy that has withstood the aggressive monetary tightening imposed by the Federal Reserve. Gross domestic product rose at an annual rate of 1.4% in the first quarter and is on track to increase by 2.7% in the second quarter, according to the Federal Reserve Bank of Atlanta.
There have been some minor cracks in the labor market recently, with unemployment claims continuing to rise to their highest level since November 2021. However, the unemployment rate remains at 4%, which is low by historical means, although it is also rising at a slow pace.
