The Federal Reserve’s preferred inflation measure cooled further as consumer spending rose only moderately, good news for central bankers who have been trying to curb demand and control price increases.
The personal consumption expenditure index rose 2.6 percent in May from a year earlier, in line with economists’ forecasts and down from 2.7 percent previously.
After stripping out volatile food and fuel prices to give a better sense of the inflation trend, a “core” price measure also rose 2.6 percent from a year earlier, compared with 2.8 percent in April. And on a monthly basis, inflation was particularly mild and prices did not rise overall.
The Fed is likely to watch the new inflation data closely as central bankers consider their next policy moves. Starting in 2022, authorities have raised interest rates sharply to curb demand from consumers and businesses, which in turn may help slow price rises. But they have kept borrowing costs stable at 5.3 percent since July 2023 as inflation has slowly fallen and are considering when to start cutting interest rates.
While officials expected several rate cuts this year at the start of 2024, they have pushed back those expectations after inflation proved stubborn earlier in the year. Policymakers have indicated they still believe they could make one or two rate cuts before the end of the year, and investors now believe the first cut could come in September.
But whether that happens depends on what happens to the economic data – both for prices and for the labor market.
Inflation remains above the Fed’s annual target of 2 percent, but is much slower than at its peak in 2022, when headline PCE inflation reached 7.1 percent. And a separate but related measure, the consumer price index, hit an even higher peak of 9.1 percent and is now also down sharply.
Fed officials have made clear they will cut interest rates when inflation has slowed enough that they are confident it is fully under control or if the labor market shows an unexpected slowdown.
Policymakers generally expect inflation to cool in the coming months, although some have expressed concerns that the process could stall.
“Much of the progress on inflation last year was due to improvements on the supply side, including the easing of supply chain constraints; Increase in the number of available workers, due in part to immigration; and lower energy prices,” Michelle Bowman, a Fed governor, said in a speech this week. She suggested that these forces may provide less assistance in the future.
But other officials are nervously waiting for a slowdown that will begin to ripple through the broader economy and could soon impact the job market, fearing that keeping interest rates too high for too long could come at the expense of American workers remain because growth is slowing down too much.
Hiring has remained strong so far and although wage growth is slowing, it is still robust. However, some indicators suggest that working conditions are actually worsening – the number of job vacancies has fallen significantly, the unemployment rate has increased slightly and jobless claims have increased slightly recently.
“The labor market has been slow to adjust and the unemployment rate has increased only slightly,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said in a speech this week. “But we are approaching a point where that positive outcome may be less likely.”
Friday’s report showed that consumer spending remained cool in May, further evidence that the economy is gaining momentum.
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2024-06-28 16:33:03
www.nytimes.com
