In a significant development, US prices remained stable in May, marking the first time since November that there was no monthly increase. The closely watched Personal Consumption Expenditures price index, which the Federal Reserve uses for its 2% inflation target, held steady from April. The index also slowed to 2.6% for the 12 months ended in May from 2.7% the previous month, according to data released by the Commerce Department on Friday.
The report attributed the slowing of overall inflation to falling gas prices (down 2.1% for the month) and cheaper goods prices (down 0.4%). Food prices saw a modest increase of 0.1%. Excluding the volatile categories of energy and food, the core PCE price index increased by 0.1% for the month, cooling to a three-year low of 2.6% from 2.8% the month before.
Consumer spending, a significant driver of economic activity, increased by 0.2% for the month, accelerating from the previous month’s 0.1%. Real spending, excluding inflation, grew by 0.3%. A 0.5% increase in personal income and disposable income helped boost spending levels, leading to a rise in the personal savings rate to 3.9%, the highest level since January.
Economists have suggested that slowing inflation, combined with a softening economic growth, could prompt at least one rate cut by the Federal Reserve this year. The May PCE data has increased optimism among investors, with the probability of a rate cut in September rising to 61.1% from 59.5% on Thursday, according to the CME FedWatch tool.
“The report couldn’t have been much better for the economy at this stage,” said Robert Frick, a corporate economist with Navy Federal Credit Union. “More income is key to improving spending, which has been lackluster recently, and weaker inflation gives the Fed more leeway to cut rates, especially if the job market flags.”
As the story continues to develop, updates will be provided.
