Key Inflation Gauges Cool in May, Welcome News for the Federal Reserve

The Federal Reserve's favored measure of inflation cooled in May, slightly encouraging news that could give policymakers confidence that price gains are still moderating – although progress remains slow.

Although inflation has fallen mostly overall in recent months, Fed officials have been closely tracking the “core” measure of the Personal Consumption Expenditure index that cuts the cost of groceries and fuel, which they say offers a better signal of how rising prices may shape. . in the months and years to come. That size has stuck elevated level and has come down only haltingly.

It moderated – but not drastically – in May. Prices were up 4.6 percent from a year earlier, excluding food and fuel. That compared with an expected increase of 4.7 percent, which would match the previous month.

Core inflation has been hovering 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. Stubbornness has been a source of concern for policy makers who have spent more than a year raising interest rates to try to grapple with rapid inflation.

Progress in fighting inflation overall has been faster and more encouraging. The Personal Consumption Expenditures index measure that includes food and gas rose 3.8 percent year-to-date to May, in line with economists' forecasts — and was below 4 percent for the first time since April 2021. The measure peaking at around 7 percent last summer.

More moderate overall inflation took some of the pressure off consumers: Cheaper gas tanks and less rapid price hikes in the aisles of the grocery store helped payrolls further. But for officials at the Fed, signs that inflation remains stubbornly beneath the surface have become cause for concern. Officials believe they need to fight core price increases lower to ensure that the future of the economy is one of modest, steady price increases.

To do that, Fed policy makers have raised interest rates. Making it more expensive to get a home loan or expand a business limits economic momentum. By slowing growth and cooling demand, the moves are meant to make it harder for companies to raise prices without losing customers.

Policymakers missed a rate hike at their June meeting after 10 straight moves, but they have signaled they expect to raise rates above their current level of above 5 percent – ​​possibly to 5.5 percent by the end of the year. Investors are only betting on one more move this year, but they increasingly see two rate moves as a possibility.

Jerome H. Powell, chairman of the Fed, emphasized this week at an event in Madrid that the prospect of how much more rates will move this year is uncertain.

“We have all seen inflation, time and time again, prove to be more persistent and stronger than expected,” said Mr. Powell. “At some point that might change. And I think we have to be prepared to follow the data and be a little patient as we let this unfold.”