Fed’s Favored Inflation Gauge Falls Slightly in May | Economy


An index of inflation closely watched by the Federal Reserve dipped slightly in May, perhaps signaling that prices may be slowing somewhat from their rapid pace earlier this year.

The “core” personal consumption expenditures index, which strips out often volatile food and energy costs, rose at an annual rate of 4.7% in May, down from 4.9% in April, the Bureau of Economic Analysis reported on Thursday.

The index rose 0.3% for the month, unchanged from April. Economists had expected an annual rate of 4.8% and a monthly increase of 0.4%.

The overall index rose 6.3% for the year, unchanged from April.

The Fed often cites the core index as it monetary policy. The central bank is raising interest rates to forward off inflation, which has been running at an 8.6% annual rate measured by the more common consumer price index.

Disposable personal income, meanwhile, increased 0.5% for the month while spending increased 0.2%.

Inflation picked up in 2021 as the economy recovered from the coronavirus, and then it spiked this year as the Russian invasion of Ukraine drove energy and food prices higher. However, prices for some commodities and materials have fallen of late, with lumber used in housing notably down from its pandemic peak.

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“Declining industrial metal prices reflects weak economic conditions in China, which accounts for half of the global demand for metals such as copper, iron ore, and aluminum,” BCA Research noted Thursday morning. “Meanwhile, prices of wheat, corn, cotton, soybeans, coffee, and sugar are all below their peaks earlier this year. These trends are also consistent with heightened recession fears.”

Economists are split over whether the US can avoid a recession as the Fed raises interest rates to a level that would choke off inflation. Some note that bond yields have fallen following their recent run-up and that the labor market is still very strong. On Wednesday, the government revised down the rate of economic growth in the first quarter to a loss of 1.6% from 1.5% previously.

“The 10-year bond is at 3.17%,” says Tim Holland, chief investment officer at Orion Advisor Solutions. “If the Fed only gets to three and a quarter or three and a half, maybe we’ve seen the peak.”

And gas prices have fallen nearly 9 cents a gallon in the past week, to a national average of $4.88, after reaching the $5-a-gallon mark. This comes as Americans head out for the July 4th weekend.

But even if inflation has reached its high point, the path downward will not be a quick one, especially given the Fed’s goal for an average annual rate of 2% inflation.

“It isn’t going to be immediate that we see 2% inflation,” Cleveland Federal Reserve Bank President Loretta Mester said in an interview with CBS News on Sunday. “It will take a couple of years, but it will be moving down.”

Stocks, meanwhile, were set to open down Thursday with Dow Jones Industrial Average futures off more than 300 points. As it is the last day of trading in the quarter with markets closed Monday for July 4th, traders will be looking to tidy up their portfolios.

As it is, the broad market is on tap for its worst first half of the year in the decades.

The combination of declining asset prices and rampant inflation has led consumers to take on more credit card debt while also dipping into their savings, according to the June monthly survey of household finances from data intelligence firm Morning Consult.

“Consumers are shareutilizing credit cards to make purchases: The adults who said they typically carry unpaid balances each month climbed 5% in May 2022 to a year ago, with especially increased increases among lower-income adults (6%) single parents (14%),” Morning Consult said in its report.

“The share of adults who said they had money left over after monthly paying expenses declined to less than 52% in May 2022 — 8 points lower than in May 2021 and the lowest level since tracking began in September 2020,” the firm added.

Separately, the Labor Department on Thursday reported that the number of Americans filing first-time claims for unemployment benefits fell by 2,000 last week from the previous week’s revised 233,000.

The four-week moving average, meanwhile, was 231,750, an increase of 7,250 from the prior level.

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