The US Federal Reserve’s preferred inflation indicator shows that price pressures continue to ease

The US Federal Reserve’s preferred inflation indicator shows that price pressures continue to ease
The US Federal Reserve’s preferred inflation indicator shows that price pressures continue to ease

WASHINGTON (AP) — A price indicator closely watched by the Federal Reserve Bank suggests that inflationary pressures in the U.S. economy are continuing to ease.

The Commerce Department’s report on Friday showed that consumer prices remained unchanged from April to May, the weakest such trend in more than four years. Compared to a year ago, prices rose 2.6 percent last month, slightly less than in April.

Excluding volatile food and energy prices, so-called core inflation rose by 0.1 percent from April to May and by 2.6 percent compared to the same period last year. Both figures represented a slight improvement compared to the previous month’s data.

The latest figures are likely to be welcomed by Fed policymakers, who have said they need to be sure inflation is moving toward their 2 percent target on a sustainable basis before they start cutting rates. Fed rate cuts, which most economists say could begin in September, would ultimately lead to lower borrowing rates for consumers and businesses.

The Fed raised its benchmark interest rate 11 times in 2022 and 2023 to stem the worst wave of inflation in four decades. Inflation has cooled significantly from its 2022 peak. Yet average prices remain well above pre-pandemic levels, a source of frustration for many Americans and a potential threat to President Joe Biden’s re-election. But Friday’s data are further signs that inflationary pressures continue to ease, albeit at a slower pace than last year.

The Fed tends to favor the inflation indicator the government released on Friday – the personal consumption expenditures price index – over the more familiar consumer price index. The PCE index tries to account for changes in people’s shopping habits as inflation rises. It can capture, for example, when consumers switch from expensive national brands to cheaper store brands.

Like the PCE index, the latest consumer price index showed that inflation eased for the second month in a row in May, bolstering hopes that the price increase seen at the beginning of the year is over.

The sharply higher borrowing costs following the Fed’s interest rate hikes, which pushed the benchmark interest rate to a 23-year high, were likely to have pushed the country into recession. Instead, the economy continued to grow and employers continued to hire new workers.

Recently, however, the economy’s momentum appears to be waning as higher interest rates appear to be weakening the ability of some consumers to continue spending freely. On Thursday, the government reported that the economy grew 1.4% annually from January to March, the slowest quarterly growth since 2022. Consumer spending, the main driver of the economy, grew just 1.5% annually.

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