The latest economic measure released by the Federal Reserve indicates that inflation during May has slowed down significantly, reaching its lowest annual rate in over three years. The core personal consumption expenditures price index saw a modest increase of just 0.1% for the month, while it was up 2.6% from a year ago. This figure represents a decrease of 0.2 percentage point from the previous month’s level, as per the Commerce Department report. Notably, both of these numbers were in line with the Dow Jones estimates.
This decline in inflation marks the lowest annual rate since March 2021 when inflation surpassed the Fed’s 2% target for the first time in the economic cycle. Additionally, when including food and energy prices, headline inflation remained flat for the month and was also up 2.6% on an annual basis, meeting expectations.
Aside from inflation, the Bureau of Economic Analysis report revealed that personal income saw a stronger increase of 0.5% on the month, exceeding the 0.4% estimate. However, consumer spending only rose by 0.2%, falling short of the 0.3% forecasted growth. Prices during the month were kept in check due to a 0.4% decline in goods prices and a significant 2.1% drop in energy prices. This decline was offset by a 0.2% increase in services and a 0.1% gain in food prices. Despite these fluctuations, housing prices continued to rise steadily, increasing by 0.4% for the fourth consecutive month.
Shelter-related costs have proven to be more resilient than expected by Federal Reserve officials, contributing to the central bank’s decision to hold off on reducing interest rates as anticipated earlier this year.
Following the release of the economic data, stock market futures showed modest positivity while Treasury yields were negative on the session. Investors have been closely monitoring the Federal Reserve’s stance on interest rates for the year and have adjusted their expectations accordingly. Initially, there were speculations of at least six rate cuts in 2024, but the current projections only foresee two rate reductions, starting in September. During their June meeting, Fed officials had indicated the possibility of a single rate cut this year.
Seema Shah, Chief Global Strategist at Principal Asset Management, stated that the lack of surprise in the latest PCE numbers is a relief and it will be welcomed by the Fed. However, the overall policy path remains uncertain, and a further deceleration in inflation coupled with evidence of a softening labor market will be crucial in paving the way for a rate cut in September.
The Federal Reserve’s target inflation rate stands at 2%, and after initially dismissing rising prices as transitory effects of the Covid pandemic, the central bank began raising interest rates in March 2022. The last rate hike took place in July 2023, bringing the benchmark overnight borrowing level to a range of 5.25%-5.50%, the highest in over two decades. Despite this aggressive monetary tightening, recent economic data suggests that the economy has been resilient.
Gross domestic product (GDP) saw a 1.4% annualized rate growth in the first quarter and is projected to increase by 2.7% in the second quarter, according to the Atlanta Fed. While there have been some signs of strain in the labor market, with continuing jobless claims reaching their highest level since November 2021, the unemployment rate remains at 4%, relatively low by historical standards.
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