Key inflation gauge cooled in May, a glimmer of good news for the Fed

The Federal Reserve’s preferred inflation measure cooled in May, slightly encouraging news that could give policymakers confidence that price increases are still moderating, though progress remains sluggish.

While inflation has generally fallen significantly in recent months, Fed officials have been closely monitoring the “core” measure of the Personal Consumption Expenditures Index, which lowers the cost of food and gas, which they say gives a better signal of how price increases could be shaped in the coming months and years. This measure has been adhered to an elevated level and comes down only hesitantly.

It moderated – but not drastically – in May. Prices rose 4.6 percent from the previous year, excluding food and fuel. That compares to a forecast for a 4.7 percent increase, which would have been in line with the previous month.

Core inflation has fluctuated between 4.6 and 4.7 percent since December 2022, below last year’s peak of 5.4 percent, but still well above the Fed’s 2 percent inflation target. Its stubbornness has been a concern for policymakers who have spent more than a year raising interest rates to try and control rapid inflation.

Progress in tackling headline inflation is faster and more encouraging. The index for personal consumption expenditures, including food and gas, rose 3.8 percent in the year through May, in line with economists’ forecasts — and below 4 percent for the first time since April 2021. peaked at about 7 percent last summer.

A more subdued general inflation takes the pressure off consumers: cheaper petrol tanks and less rapid price increases in the supermarket ensure that pay slips continue to rise. But for Fed officials, signs that inflation remains stubborn below the surface were a cause for concern. Officials believe they need to wrestle core price increases lower to ensure the economy’s future is one of modest and steady price increases.

To do that, Fed policymakers have raised interest rates. Making it more expensive to get a mortgage or expand a business limits the momentum of the economy. By slowing growth and cooling demand, the measures should make it more difficult for companies to raise their prices without losing customers.

Policymakers skipped a rate hike after 10 consecutive moves at their June meeting, but have signaled they expect to raise rates above their current level of just above 5 percent – ​​perhaps as high as 5.5 percent by the end of the year . Investors have only taken one step this year, but they are increasingly seeing two interest rate moves as a possibility.

Fed Chairman Jerome H. Powell emphasized at an event in Madrid this week that the outlook for how much more rates could rise this year is uncertain.

“We have all seen time and time again that inflation turned out to be more stubborn and stronger than expected,” said Mr. Powell. “At some point that may change. And I think we need to be ready to track the data and have a little bit of patience as we let this unfold.