A key economic measure from the Federal Reserve showed on Friday that inflation fell to its lowest annual level in more than three years in May.
According to a Commerce Department report, the core price index for personal consumption expenditures rose just 0.1% on a seasonally adjusted basis this month, 2.6% higher than a year ago, with the latter figure 0.2 percentage points lower than April’s level.
Both figures were in line with Dow Jones estimates. May marked the lowest 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 remained flat over the month and also rose 2.6% on an annual basis. These measured values also corresponded to expectations.
“It’s just additional news that monetary policy is working, inflation is starting to cool,” San Francisco Fed President Mary Daly told CNBC’s Andrew Ross Sorkin during a “Squawk Box” interview. “This is a relief for companies and households struggling with persistently high inflation. This is good news for how politics works.”
The Fed focuses on the PCE inflation reading rather than the Labor Department’s Bureau of Labor Statistics’ more widely used Consumer Price Index. PCE is a more comprehensive measure of inflation and takes into account changes in consumer behavior, such as replacing their purchases when prices rise.
While the central bank officially sticks to the PCE headline, officials generally emphasize core readings as a better indicator of longer-term inflation trends.
Excluding the inflation numbers, the Bureau of Economic Analysis report showed personal income rose 0.5% month-on-month, higher than the 0.4% estimate. However, consumer spending rose 0.2%, weaker than the 0.3% forecast.
Prices were kept in check during the month by a 0.4% fall in goods and a 2.1% fall in energy, a 0.2% rise in services and a 0.1% rise in compensated with food.
However, house prices continued to rise, rising 0.4% month-on-month for the fourth consecutive month. The costs associated with the shelter-in-place measures proved more severe than Federal Reserve officials expected and have contributed to the central bank’s failure to cut interest rates this year as expected.
Stock market futures were slightly positive following the report, while Treasury yields were negative during the session.
Investors have tried to thwart the Fed’s interest rate intentions this year and have had to scale back their expectations. While traders had expected at least six rate cuts this year at the start of 2024, they now expect just two, starting in September. Fed officials at their June meeting planned only one rate cut this year.
“The lack of surprises in today’s PCE numbers is a relief and is welcomed by the Fed,” said Seema Shah, chief global strategist at Principal Asset Management. “However, the political course has not yet been determined. A further slowdown in inflation, ideally coupled with further signs of weakening in the labor market, will be necessary to pave the way for an initial rate cut in September.”
The Fed is targeting 2% inflation and began raising interest rates in March 2022 after dismissing a year of rising prices as a temporary impact of the Covid pandemic that was likely to fade. The central bank last raised rates in July 2023 after raising its overnight borrowing benchmark to a range of 5.25% to 5.50%, the highest in about 23 years.
Recent economic data paints a picture of an economy that has withstood the Fed’s aggressive monetary tightening. According to the Atlanta Fed, gross domestic product rose 1.4% on an annual basis in the first quarter and is expected to rise 2.7% in the second quarter.
There have been slight dips in the labor market recently, with ongoing jobless claims reaching their highest level since November 2021. However, the unemployment rate is still at 4%, which is low by historical standards, but is also slowly increasing.
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2024-06-28 16:27:17
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