In May, the Federal Reserve’s favored measure of inflation slowed down, providing hope for a potential rate cut. The Personal Consumption Expenditures (PCE) index recorded a minimal increase in prices for the month, marking the slowest pace since November.
Year-over-year, prices increased by 2.6%, a decrease from 2.7% in April. The “core” inflation, which excludes volatile prices for food and energy, also decreased from 2.8% to 2.6%. This is closer to the Federal Reserve’s target annual goal of 2%.
Economist Micheal Pearce from Oxford Economics noted that while prices remained unchanged in May, the gain in core PCE deflator was the smallest seen since 2020. This indicates that officials will need to see more positive inflation reports before considering a cut in interest rates, but they will not wait until inflation falls to the 2% target.
Recent findings from the Consumer Price Index (CPI) align with today’s report on inflation, suggesting that inflation might still be higher than desired but is on a downward trend. The second-quarter declines have eased concerns about inflation escalating after a rise in the first quarter.
The Federal Reserve closely monitors the PCE when making decisions about the fed funds rate, which influences interest rates on various types of borrowing. The report on inflation is a positive sign for those hoping for relief from the high fed funds rate, which has been maintained for over two years to combat inflation. Economists anticipate that the central bank could potentially lower rates as soon as September if this trend continues and more data supports it.