The Federal Reserve's favorite measure of inflation continues to fall as consumer spending growth remains modest, good news for the central bank, which has sought to tame demand and keep prices down.
The personal consumption expenditures index rose 2.6 percent in May from a year earlier, in line with economists' expectations but down from the previous reading of 2.7 percent.
The “core” price index, which excludes volatile food and fuel prices to get a more accurate picture of inflation trends, also rose 2.6% year-on-year, down from 2.8% in April. On a monthly basis, inflation was particularly benign, with prices not rising overall.
The Fed is likely to keep a close eye on the latest inflation data as the central bank considers its next policy steps. Officials have been raising interest rates sharply since 2022 to put the brakes on consumer and business demand and slow price growth. But with inflation gradually declining, the Fed has kept borrowing costs unchanged at 5.3% since July 2023 as it considers when to start cutting rates.
Officials entered 2024 this year expecting multiple rate cuts, but pushed those expectations back after inflation proved sluggish early in the year. Policymakers have signaled they still think one or two rate cuts are possible by the end of the year, and investors now believe the first one could come as soon as September.
But whether that happens will depend on what happens with economic data on both prices and the labor market.
Inflation remains above the Fed's 2% annual target but is well below its peak in 2022, when PCE inflation hit an overall high of 7.1%. And another related measure, the Consumer Price Index, hit an even higher peak of 9.1% but is now similarly well below that.
Fed officials have vowed to cut rates if inflation slows enough to make them confident it is fully contained or if the job market shows an unexpected slowdown.
Policymakers generally expect inflation to ease in the coming months, but some have expressed concern that the process could halt.
“Much of last year's improvement in inflation was due to improvements on the supply side, including easing supply-chain constraints, increased immigration into the labor force, and lower energy prices,” Fed Governor Michelle Bowman said in a speech this week. Bowman suggested those factors may not be much help to the economic recovery going forward.
But other officials are nervously watching a slowdown that is beginning to spread across the economy and could soon hit the labor market, worrying that keeping interest rates high for too long could slow growth too much and hurt American workers.
Hiring has held up so far, and wage growth, while slowing, remains strong, but some indicators suggest that working conditions are actually worsening: The number of job openings has fallen significantly, the unemployment rate has risen slightly, and jobless claims have recently increased modestly.
“The labor market is adjusting slowly, and the unemployment rate has only risen slightly,” San Francisco Federal Reserve Bank President Mary C. Daly said in a speech this week, “but we are approaching a point where such a favorable outcome becomes less likely.”
Friday's report showed consumer spending remained weak in May, providing further evidence that momentum is building in the economy.