The Commerce Department report released Friday showed consumer prices remained stable from April to May, the most moderate reading in more than four years. Measured against the previous year, prices rose 2.6% last month, slightly less than in April.
Excluding volatility in food and energy prices, so-called core inflation was 0.1% from April to May, the smallest increase since spring 2020, when the pandemic broke out and paralyzed the economy. And compared to a year earlier, core prices rose 2.6% in May, the smallest increase in more than three years.
Prices of physical goods actually fell 0.4% from April to May. For example, gasoline prices fell 3.4%, furniture prices fell 1%, and prices for goods and recreational vehicles fell 1.6%. In contrast, prices for services, which include items such as restaurant meals and airline tickets, rose 0.2%.
The latest figures will likely be welcomed by Fed policymakers, who have said they need to be sure that inflation is slowing sustainably toward their 2% target before they begin cutting interest rates.
The Fed’s rate cuts, which most economists say could begin in September, would ultimately lead to lower borrowing rates for consumers and businesses.
“If the trend we have seen this month continues consistently for another two months, the Fed may finally have the confidence to cut rates in September,” Olu Sonola, head of U.S. economic research at Fitch Ratings, wrote in a research note.
The Fed has raised its benchmark rate 11 times in 2022 and 2023 in an effort to curb the worst stretch of inflation in four decades. Inflation has slowed significantly from its 2022 peak. Still, average prices remain well above pre-pandemic levels, a source of frustration for many Americans and a threat to President Joe Biden’s reelection bid.
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The political joust
During Thursday night’s presidential debate, Donald Trump attacked Mr. Biden’s record on inflation. The presumptive Republican nominee claimed that Mr. Biden inherited low inflation when he took office in January 2021, but that prices “have exploded under his watch.”
If inflation was actually extremely low at the start of the Biden presidency, it was largely because the country was still recovering from the brutal recession linked to the COVID-19 pandemic, which flattened the economy. Once the economy began to come back to life with unexpected speed, causing severe shortages of goods and labor, inflation skyrocketed.
Friday’s price data added to signs that inflationary pressures continue to ease, albeit more slowly than last year.
The Fed tends to favor the inflation gauge released by the government on Friday – the Personal Consumption Expenditures (PCE) Price Index – over the more familiar Consumer Price Index. The PCE index attempts to account for changes in the way people shop when inflation accelerates. This may take into account, for example, when consumers are switching from expensive national brands to cheaper store brands.
Like the PCE index, the latest consumer price index showed that inflation slowed in May for the second straight month. That reinforced hopes that the acceleration in prices that occurred earlier this year is over.
The dynamics of the economy seemed to run out of steam
The much higher borrowing costs that followed the Fed’s rate hikes, which sent its benchmark rate to a 23-year high, were widely expected to tip the country into recession. Instead, the economy continued to grow and employers continued to hire.
Lately, however, momentum in the economy has appeared to be losing steam, with high interest rates appearing to weaken the ability of some consumers to continue spending freely. On Thursday, the government announced that the economy grew at an annual rate of 1.4% from January to March, the slowest quarterly growth since 2022. Consumer spending, the main driver of the economy, increased at a modest annual rate of 1.5%.
Friday’s report also showed that consumer spending and incomes picked up in May, an encouraging sign for the economy. Adjusted for inflation, consumer spending — the main driver of the U.S. economy — rose 0.3% last month after falling 0.1% in April.
After-tax income, also adjusted for inflation, rose 0.5%, the largest gain since September 2020.
