WASHINGTON (AP) — A price indicator closely watched by the Federal Reserve Bank suggests that inflationary pressures in the U.S. economy are continuing to ease.
The Commerce Department’s report on Friday showed that consumer prices remained unchanged from April to May, the weakest such trend in more than four years. Compared to a year ago, prices rose 2.6 percent last month, slightly less than in April.
Excluding volatile food and energy prices, so-called core inflation rose 0.1 percent from April to May, the smallest augment since spring 2020, when the pandemic broke out and paralyzed the economy. And compared to a year earlier, core prices rose 2.6 percent in May, the lowest augment in more than three years.
Prices for physical goods actually fell by 0.4 percent from April to May. Gasoline prices fell by 3.4 percent, furniture prices by 1 percent, and prices for leisure goods and vehicles by 1.6 percent. On the other hand, prices for services, which include restaurant meals and airfares, rose by 0.2 percent.
The latest figures are likely to be welcomed by Fed policymakers, who have said they need to be sure inflation is moving toward their 2 percent target on a sustainable basis before they start cutting rates. Fed rate cuts, which most economists say could begin in September, would ultimately lead to lower borrowing rates for consumers and businesses.
“If the trend we have seen this month continues for two more months, the Fed may finally have the confidence needed to cut rates in September,” Olu Sonola, head of U.S. economic research at Fitch Ratings, wrote in a research note.
The Fed raised its benchmark interest rate 11 times in 2022 and 2023 to contain the worst wave of inflation in four decades. While inflation has cooled significantly from its 2022 peak, average prices remain well above pre-pandemic levels, a source of frustration for many Americans and a potential threat to President Joe Biden’s re-election.
During the presidential debate on Thursday night, Donald Trump attacked Biden’s record on inflation. The presumptive Republican nominee claimed that Biden inherited low inflation rates when he took office in January 2021, but prices have “exploded under his leadership.”
Although inflation was indeed extremely low at the start of the Biden presidency, that was largely because the country was still recovering from the brutal Covid recession that had crippled the economy. As the economy came back to life with unexpected speed and severe shortages of goods and labor emerged, inflation soared.
Friday’s price figures reinforced signs that inflationary pressures are continuing to ease, albeit at a slower pace than last year.
The Fed tends to favor the inflation indicator the government released on Friday – the personal consumption expenditures price index – over the more familiar consumer price index. The PCE index tries to account for changes in people’s shopping habits as inflation rises. It can capture, for example, when consumers switch from exorbitant national brands to cheaper store brands.
Like the PCE index, the latest consumer price index showed that inflation eased for the second month in a row in May, bolstering hopes that the price augment seen at the beginning of the year is over.
The sharply higher borrowing costs following the Fed’s interest rate hikes, which pushed the benchmark interest rate to a 23-year high, were likely to have pushed the country into recession. Instead, the economy continued to grow and employers continued to hire fresh workers.
Recently, however, the economy’s momentum appears to be waning as higher interest rates appear to be weakening the ability of some consumers to continue spending freely. On Thursday, the government reported that the economy grew 1.4% annually from January to March, the slowest quarterly growth since 2022. Consumer spending, the main engine of the economy, grew just 1.5% annually.
Friday’s report also showed that both consumer spending and incomes rose in May, encouraging signs for the economy. Adjusted for inflation, consumer spending – the main driver of the U.S. economy – rose 0.3 percent last month after falling 0.1 percent in April.
After-tax profit, also adjusted for inflation, rose by 0.5 percent. This was the largest augment since September 2020.
