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Federal Reserve’s Tracked Inflation Gauge Hits a Two-Year Low

by Madison Thomas
3 comments
inflation gauge

Last month, an important inflation index monitored by the Federal Reserve experienced a significant decline, reaching its lowest level since April 2021. This drop was primarily driven by lower gas prices and a slower increase in food costs.

During the same period, consumer spending saw minimal growth, with only a 0.1% increase, following a robust gain of 0.6% in April.

The inflation index indicated a 3.8% rise in prices in May compared to the previous year, marking a sharp decline from the 4.4% surge observed in April. Additionally, prices only increased by 0.1% from April to May.

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However, the overall progress in curbing inflation last month was tempered by the elevated reading of “core” prices, which exclude volatile food and energy costs. This reinforced the Federal Reserve’s belief that they must continue to raise interest rates in order to combat high inflation.

Core prices increased by 4.6% in May compared to the previous year, slightly lower than the annual increase of 4.7% observed in April. This marks the fifth consecutive month where the core figure was either 4.6% or 4.7%, indicating that the Federal Reserve’s streak of 10 interest rate hikes over the past 15 months has not subdued all price categories. From April to May, core prices saw a 0.3% increase, a pace that, if sustained, would keep inflation well above the Federal Reserve’s 2% target.

The government’s report on Friday follows Chair Jerome Powell’s statement two days earlier, expressing the Federal Reserve’s readiness to maintain interest rates at their peak for an extended period to control the ongoing rise in prices, which has diminished Americans’ purchasing power and disrupted businesses. The Federal Reserve’s policymakers collectively anticipate two additional rate hikes later this year.

Powell stated, “The bottom line is that (interest rate) policy hasn’t been restrictive enough for long enough” during an international forum in Sintra, Portugal. He reiterated his view that prices for services such as restaurant meals, hotel rooms, and healthcare are still increasing too rapidly, partly due to the necessity for many companies to raise wages in order to attract and retain workers.

The inflation gauge released on Friday, known as the personal consumption expenditures price index, is distinct from the government’s more well-known consumer price index. The government reported earlier this month that the consumer price index rose by 4% in May compared to the previous year.

Since the onset of inflation following the pandemic-induced recession, the personal consumption expenditures price index has consistently shown lower inflation compared to the consumer price index. This disparity can be attributed, in part, to the consumer price index giving twice as much weight to rents, which have been a major driver of inflation. Additionally, the personal consumption expenditures price index aims to account for changes in consumer spending habits when inflation surges. As a result, it can capture emerging trends, such as consumers shifting from expensive national brands to more affordable store brands.

Starting with its first rate hike in March 2022, the Federal Reserve has raised its benchmark interest rate to approximately 5.1%, the highest level in 16 years, although it refrained from hiking rates at its most recent meeting earlier this month.

Powell suggested on Wednesday that the Federal Reserve could potentially slow down the pace of rate hikes to

Frequently Asked Questions (FAQs) about inflation gauge

What is the inflation gauge tracked by the Federal Reserve?

The inflation gauge tracked by the Federal Reserve is the personal consumption expenditures price index (PCE index). It measures changes in prices for goods and services purchased by consumers and is an important indicator used by the Federal Reserve to assess inflation trends.

Why did the inflation gauge reach its lowest point in 2 years?

The inflation gauge reached its lowest point in 2 years due to factors such as lower gas prices and slower-rising food costs. These factors contributed to a decrease in overall price levels, as reflected in the index.

How did consumer spending perform during the same period?

Consumer spending saw minimal growth during the same period, with only a 0.1% increase. This indicates a relatively modest level of spending by consumers, following a more significant gain in the previous month.

What were the inflation figures reported in May compared to the previous year?

In May, the inflation index showed a 3.8% increase in prices compared to the previous year, which marked a notable decline from the 4.4% surge observed in April. This indicates a slowdown in the rate of inflation during that period.

What are core prices, and how did they change?

Core prices refer to prices that exclude volatile food and energy costs. In May, core prices rose by 4.6% compared to the previous year, slightly lower than the 4.7% increase seen in April. The consistent high level of core prices suggests that certain categories of prices have not been subdued despite multiple interest rate hikes by the Federal Reserve.

What is the Federal Reserve’s response to these inflation trends?

The Federal Reserve believes it will need to continue raising interest rates to combat high inflation. The elevated reading of core prices underscores the Fed’s belief that further rate hikes are necessary. The aim is to bring inflation back down to the Fed’s target of 2% and prevent excessive price increases in various sectors of the economy.

What impact did the inflation trends have on interest rates?

The Federal Reserve has raised its benchmark interest rate to about 5.1%, the highest level in 16 years, in response to inflationary pressures. However, the Fed is considering adjusting the pace of rate hikes to better assess the economy’s response and avoid potential economic downturns caused by overly restrictive monetary policy.

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3 comments

EconGeek87 June 30, 2023 - 1:59 pm

Inflation gauge drops, gas prices low & food costs not surging. Spending barely up, not great. May inflation up 3.8%, slower than April. Core prices also up, fed keeps hiking rates. Economy strong, but high inflation remains a challenge.

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JohnDoe123 June 30, 2023 - 8:41 pm

federal reserve tracking inflation gauge, reached lowest point in 2 years. gas prices & slower-rising food costs down. consumers barely increased spending. inflation index up 3.8% in May, slower than April. core prices up too, fed raising rates. economy strong but inflation still high.

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Bookworm26 June 30, 2023 - 10:06 pm

Federal Reserve’s inflation gauge hits 2-year low, thanks to cheaper gas & slower food cost rises. Spending growth sluggish. Inflation index up 3.8% in May, slower than April. Core prices up too, signaling fed’s interest rate hikes. Economy resilient but grappling with persistent high inflation.

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