The latest data on inflation from the Federal Reserve brings good news for central bankers as the preferred inflation measure showed signs of cooling. Consumer spending grew only moderately in May, which helped keep inflation in check.
The Personal Consumption Expenditures index rose 2.6 percent in May from a year earlier, in line with economists’ expectations and a slight decrease from the previous month. When volatile food and fuel prices were excluded, the core price measure also increased by 2.6 percent year-over-year, showing a downward trend from the April reading. Monthly inflation remained mild, with prices staying relatively stable overall.
Central bankers at the Fed are closely monitoring the fresh inflation data as they consider their next policy moves. After raising interest rates earlier this year to curb demand and control inflation, they have kept rates steady at 5.3 percent in recent months. However, with inflation gradually easing, they are contemplating when to start lowering interest rates.
Although officials initially anticipated multiple rate cuts this year, they have adjusted their expectations due to persistent inflation in early 2024. There is now speculation that a rate cut could happen as soon as September, depending on economic data.
The Fed’s goal is to bring inflation down to its 2 percent target, and recent data suggests progress in that direction. Policymakers will continue to assess economic indicators, including labor market conditions, to determine the timing of any rate adjustments.
While concerns remain about the sustainability of inflation moderation, policymakers are also wary of a potential economic slowdown. The labor market, although still strong, is showing signs of weakening, prompting discussions about the impact of high interest rates on overall growth.
The latest report indicates that consumer spending remained subdued in May, signaling a gradual cooling of the economy. Despite this, economic conditions are still relatively favorable, according to experts.
Chief economist Diane Swonk believes that there is still room for growth but emphasizes the importance of cautious monitoring by the Fed to prevent an abrupt economic slowdown. The goal, she says, is to cool the economy without causing a deep freeze.
