The Fed’s measure of inflation is dropping to its lowest point in two years

The Fed’s closely watched inflation indicator fell last month to its lowest level since April 2021, dragged down by lower gas prices and a slowdown in rising food costs.

Meanwhile, consumers barely increased their spending last month, boosting it by just 0.1%, after a strong 0.6% gain in April.

An inflation indicator showed that prices rose 3.8% in May from the previous 12 months, down sharply from 4.4% year-on-year in April. And in the April-May period, prices rose just 0.1%.

However, progress made last month in easing headline inflation was tempered by a higher reading for “core” prices, a category that excludes volatile food and energy prices. confirmed that Fed Faith They will need to continue to raise interest rates to beat high inflation.

Core prices rose 4.6% in May from a year earlier, down slightly from the 4.7% annual increase in April. It was the fifth consecutive month that the core number was either 4.6% or 4.7% – a sign that the Fed’s series of 10 rate hikes over the past 15 months have not dampened all rate categories. From April to May, core prices rose 0.3%, a pace that, if sustained, will keep inflation well above the Fed’s 2% target.

The government report on Friday arrives two days later Federal Reserve Chairman Jerome Powell said It was prepared to keep interest rates at their peaks for a long time to tame the still-rising prices that have squeezed Americans’ inflation-adjusted salaries and disrupted business. Fed policymakers, as a group, envisage two more rate hikes this year.

“The bottom line is that (interest rate) policy has not been restrictive enough for long enough,” Powell said in his remarks at an international forum in Sintra, Portugal. He reiterated his view that prices for services such as restaurant meals, hotel rooms and health care were still rising very quickly, driven in part by the need for many companies to raise wages to attract and retain workers.

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The measure of inflation released on Friday, called the Personal Consumption Expenditure Price Index, is separate from the consumer price index known to the government. The government reported earlier this month that The Consumer Price Index rose 4% in May 12 months ago.

Since inflation started to rise after the pandemic recession, the PCE index tends to show lower inflation than the CPI. In part, this is because rents, which have been among the biggest drivers of inflation, carry twice as much weight in the consumer price index as they do in personal consumption expenditures. In addition, the personal consumption expenditures index seeks to account for changes in how people shop when inflation jumps. As a result, it can catch emerging trends—when consumers, for example, move away from expensive national brands in favor of cheaper store brands.

Starting with the first hike in March 2022, the Fed raised its benchmark interest rate to about 5.1%, its highest level in 16 years, by Giving up a hike at her last meeting earlier this month.

On Wednesday, Powell suggested that the Fed may slow rate hikes to the pace of every other meeting, though he cautioned that central bank policymakers had yet to agree to that. Adjusting the pace of rate hikes will allow Fed officials to better gauge how the economy will be affected and possibly avoid tightening credit as much as it pushes the economy into a painful recession.

“But I wouldn’t rule out (raising rates) on back-to-back meetings at the table at all,” Powell said.

The economy showed surprising resilience despite the Fed’s defiant rate hike Long-term predictions of a recession. A measure of the economy’s growth in the first three months of the year was sharply upgraded Thursday to a level of Solid annual pace of 2%from a previous estimate of 1.3%.

However, the durability of the economy can be a mixed blessing. The Federal Reserve raises interest rates to try to calm borrowing and spending by businesses and consumers. She hopes that employers will then reduce their demand for workers, which in turn may slow wage increases and inflationary pressures.

However, if the economy continues to expand at a strong pace, the Fed will likely feel compelled to send higher rates to achieve its goal of bringing inflation down to 2%.