The Federal Reserve’s preferred measure of inflation continues to show signs of cooling, accompanied by moderate growth in consumer spending – positive news for central bankers aiming to control rising prices and curb demand.
In May, the personal consumption expenditure (PCE) index rose 2.6% from a year earlier, meeting economists’ expectations and down slightly from April’s 2.7% increase. Excluding more volatile food and fuel prices, core inflation also rose 2.6% year-on-year, down from 2.8% in April. On a monthly basis, inflation remained particularly subdued, with overall prices showing no significant increases.
The Federal Reserve is likely to be looking closely at this new inflation data as it considers its next policy moves. Since 2022, the Fed has been aggressively raising interest rates to suppress consumer and business demand, which can help slow price increases. However, since July 2023, borrowing costs have held steady at 5.3% as inflation has gradually eased. The Fed is now deliberating on the timing of any interest rate cuts.
While officials initially expected to implement multiple rate cuts in 2024, those plans have been delayed due to persistent inflation early in the year. Policymakers still expect one or two rate cuts before the end of the year, with investors speculating that the first cut could come in September. However, that decision will depend on upcoming economic data, including inflation and labor market metrics.
While inflation remains above the Fed’s annual target of 2%, it has slowed significantly from its 2022 peak, when headline PCE inflation hit 7.1%. The related measure, the consumer price index (CPI), peaked even higher at 9.1% and has since fallen substantially.
Fed officials have indicated that rate cuts will begin once they are confident that inflation is under control or if the job market weakens unexpectedly. While policymakers generally expect inflation to slow in the coming months, some express concerns about potential stagnation.
“Much of the gains in inflation last year were driven by supply-side improvements, including loosening supply chain constraints, greater availability of workers partly driven by immigration, and lower energy prices,” Fed Chair Michelle Bowman said in a speech this week. She warned that these factors could be less favorable going forward.
Conversely, other officials worry that a broader economic slowdown could soon impact the labor market, fearing that keeping interest rates high for too long could dampen growth too much and hurt American workers.
Hiring has remained robust, and while wage growth is cooling, it remains strong. However, some indicators suggest that working conditions are weakening: job openings have fallen sharply, the unemployment rate has risen, and unemployment claims have risen slightly.
“The labor market has been slow to adjust, and the unemployment rate has risen only slightly,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, noted in a recent speech. “But we are approaching a point where that positive outcome may be less likely.”
The report released Friday found that consumer spending remained moderate in May, further evidence that the economy is losing momentum.
