Fed’s preferred inflation gauge rose 2.6% in May in signal that prices could be easing

A key measure of inflation pointed to a slowdown in the rate at which the prices of goods are rising – stoking optimism on Wall Street that the Federal Reserve will cut interest rates later this year.

The personal consumption expenditures price index (PCE) – the Fed’s preferred gauge of inflation – rose 0.1% in May compared to the previous month and 2.6% year-over-year, according to the Commerce Department.

The 2.6% rate was a slight improvement from the 2.7% number recorded in April – boosting the case that inflation appears to be easing.

The Fed is aiming to get inflation to 2% before cutting rates.

Rate cuts by the Fed, which most economists think could start in September, would lead eventually to lower borrowing rates for consumers and businesses.

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“If the trend we saw this month continues consistently for another two months, the Fed may finally have the confidence necessary for a rate cut in September,” Olu Sonola, head of US economic research at Fitch Ratings, wrote in a research note.

Excluding volatile food and energy prices, so-called core inflation rose 0.1% from April to May, the smallest increase since the spring of 2020, when the pandemic erupted and shut down the economy.

And compared with a year earlier, core prices were up 2.6% in May, the lowest increase in more than three years.

Prices for physical goods actually fell 0.4% from April to May.

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Gasoline prices , for example, dropped 3.4%, furniture prices 1% and the prices of recreational goods and vehicles 1.6%.

On the other hand, prices for services, which include items like restaurant meals and airline fares, ticked up 0.2%.

The latest figures will likely be welcomed by the Fed’s policymakers, who have said they need to feel confident that inflation is slowing sustainably toward their 2% target before they’d start cutting interest rates.

At the peak of inflation, PCE was up 7.1% in 2022 while the consumer price index reached an astounding 9.1%.

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CPI has also been trending downward. In May, CPI inflation clocked in at 3.3% compared to a year earlier – slightly beating analyst forecasts of 3.4%.

Earlier this week, Fed governor Michelle Bowman tried to temper expectations for a rate cut, saying that it may be necessary for the central bank to hike interest rates again.

“Inflation in the US remains elevated and I still see a number of upside inflation risks that affect my outlook,” Bowman said at an event hosted by the Policy Exchange think tank in London.

Bowman said that she “remain[s] willing to raise the target range for the federal-funds rate at a future meeting should progress on inflation stall or even reverse.”

“Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2% over the longer run,” she said.

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