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

52

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.

OTHER NEWS

• European inflation decreases to 5.5%, but central bank rate hikes remain unaffected
• Wall Street anticipates gains as the month concludes
• Inflation in Europe varies, with rates of 6.8% in Germany and 1.6% in Spain
• Prominent central bankers emphasize the necessity of higher interest rates to address persistent inflation

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

More about inflation gauge

• Federal Reserve Economic Data (FRED) – Personal Consumption Expenditures Price Index
• Federal Reserve Bank of St. Louis – Personal Consumption Expenditures (PCE) Index
• Bureau of Economic Analysis – Personal Consumption Expenditures
• Federal Reserve Bank of Cleveland – Inflation: Core Versus Headline Rates
• Reuters – U.S. consumer spending barely rises; core inflation slows
• The Wall Street Journal – Fed’s Powell Says More Interest Rate Rises Are Likely Ahead