The Fed’s Preferred Inflation Measure Cools, Welcome News

The economy appears to be downshifting and price gains are moderating, as Federal Reserve officials creep closer to beating inflation.

The Federal Reserve’s preferred inflation measure continued to cool as consumer spending grew only moderately, good news for central bankers who have been trying to weigh down demand and wrestle price increases under control.

The Personal Consumption Expenditures index climbed 2.6 percent in May from a year earlier, matching what economists had forecast and down from 2.7 percent previously.

After stripping out volatile food and fuel prices to give a better sense of the inflation trend, a “core” price measure was also up 2.6 percent from a year ago, down from 2.8 percent in the April reading. And on a monthly basis, inflation was especially mild, and prices did not climb on an overall basis.

The Fed is likely to watch the fresh inflation data closely as central bankers think about their next policy steps. Officials raised interest rates sharply starting in 2022 to hit the brakes on consumer and business demand, which in turn can help to slow price increases. But they have held borrowing costs steady at 5.3 percent since July 2023 as inflation has slowly come down, and have been contemplating when to begin lowering interest rates.

While officials came into 2024 expecting to make several rate cuts this year, they have pushed those expectations back after inflation proved stubborn early in the year. Policymakers have suggested that they still think they could make one or two rate cuts before the end of the year, and investors now think that the first reduction could come in September.

But whether that happens hinges on what happens with economic data — both for prices and for the labor market.