A key economic measure for the U.S. Federal Reserve showed on Friday that inflation in May slowed to its lowest annual rate in more than three years.
The core personal consumption expenditure price index rose just a seasonally adjusted 0.1% for the month and rose 2.6% from a year earlier, the latter number down 0.2 percentage points from April levels, according to Department of Commerce report.
Both numbers were in line with Dow Jones estimates. May marked the slowest annual rate since March 2021, marking the first time this economic cycle that inflation exceeded the Fed’s 2% target.
Including food and energy, headline inflation was flat in the month and also rose 2.6% year-on-year. These readings were also in line with expectations.
“It’s just additional news that monetary policy is working, inflation is gradually coming down,” San Francisco Fed President Mary Daly told CNBC’s Andrew Ross Sorkin during an interview on “Squawk Box.” “This is a relief for businesses and households 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 measure of inflation and represents changes in consumer behavior, such as replacing their purchases when prices rise.
While the central bank officially tracks the PCE headline, officials generally emphasize the core reading as a better indicator of longer-term inflation trends.
Inflation numbers aside, the Bureau of Economic Analysis report showed personal income rose 0.5 percent month-on-month, higher than the 0.4 percent estimate. Consumer spending, however, rose 0.2%, below the 0.3% forecast.
Prices were kept in check during the month by a 0.4% drop in goods and a 2.1% slide in energy, which offset a 0.2% rise in services and a 0.1% gain in food.
However, home prices continued to rise, rising 0.4% month-on-month for the fourth time in a row. Shelter-related costs have proven stickier than Federal Reserve officials expected and have helped keep the central bank from cutting interest rates as expected this year.
Stock market futures were moderately positive after the report, while bond yields were negative in the session.
Investors are trying to block the Fed’s interest rate intentions this year and have had to temper expectations. While traders earlier in 2024 expected at least six rate cuts this year, they are now pricing in just two, starting in September. Fed officials at their June meeting made just 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 policy path is not yet certain. A further slowdown in inflation, ideally coupled with additional signs of labor market easing, will be necessary to pave the way for a first rate cut in September.”
The Fed is targeting 2% inflation and began raising rates in March 2022 after a year of dismissing rising prices as temporary effects from the Covid pandemic that would likely fade. The central bank last raised interest rates in July 2023 after raising its lending rate to a range of 5.25%-5.50%, the highest in 23 years.
Recent economic data has painted a picture of an economy that has withstood the Fed’s aggressive monetary tightening. Gross domestic product grew at an annual rate of 1.4% in the first quarter and is on pace to grow 2.7% in the second quarter, according to the Atlanta Fed.
There have been some minor cracks in the labor market lately, with ongoing jobless claims reaching their highest level since November 2021. However, the unemployment rate is still 4%, a historic low, although it is also rising at a slow pace .
