U.S. prices remained stable in May, while consumer spending saw a moderate increase, potentially bringing the Federal Reserve closer to cutting interest rates this year. The personal consumption expenditures (PCE) price index showed no change in May, following a 0.3% rise in April, according to the Commerce Department’s Bureau of Economic Analysis on Friday. Over the year through May, the PCE price index rose 2.6%, slightly down from a 2.7% increase in April.
Economists polled by Reuters had predicted the PCE price index would remain unchanged for the month and rise 2.6% year-on-year. Inflation is easing after a surge in the first quarter, influenced by 525 basis points of rate hikes by the U.S. central bank since 2022, aimed at cooling domestic demand. However, inflation is still above the Fed’s 2% target.
Excluding the volatile food and energy components, the core PCE price index inched up 0.1% in May, following a revised 0.3% increase in April. The core PCE price index had previously been reported as a 0.2% rise in April.
Core inflation rose 2.6% year-on-year in May, marking the smallest increase since March 2021, after a 2.8% rise in April. The Fed monitors the PCE price measures for monetary policy. Sustained monthly inflation readings of 0.2% are needed to bring inflation back to the target.
The Fed has kept its benchmark overnight interest rate in the 5.25%-5.50% range since last July. Despite a more hawkish recent outlook from policymakers, financial markets anticipate the Fed may begin easing in September.
Consumer spending, which represents over two-thirds of U.S. economic activity, increased by 0.2% in May after a 0.1% rise in April, the report showed. Factors like inflation fatigue, higher borrowing costs, slower wage growth, and decreasing savings are restraining spending.
Consumer spending significantly slowed in the first quarter, limiting economic growth to a 1.4% annualized rate, down from a 3.4% pace in the fourth quarter. Second-quarter growth estimates are mostly below 2%.
