Inflation in the United States eased in May for a second straight month, a hopeful sign that an acceleration of prices that occurred early this year may have passed. The trend, if it holds, could move the Federal Reserve closer to cutting its benchmark interest rate from its 23-year peak.
Consumer prices excluding volatile food and energy costs — the closely watched “core” index — rose 0.2% from April to May, the government said Wednesday. That was down from 0.3% the previous month and was the smallest increase since October. Measured from a year earlier, core prices climbed 3.4%, below last month’s 3.6% rise, and the mildest such increase in three years.
Fed officials, who will end their latest policy meeting later Wednesday, are scrutinizing each month’s inflation data to assess their progress in their fight against rising prices. Even as overall inflation moderates, such necessities as groceries, rent and health care are much pricier than they were three years ago — a continuing source of public discontent and a political threat to President Joe Biden’s re-election bid.
Most other measures suggest that the economy is healthy: Unemployment remains low, hiring is robust and consumers are traveling, eating out and spending on entertainment.
And Wednesday’s report indicated that consumers are beginning to get some relief from the price spikes of the past three years. Grocery costs were unchanged, on average, from April to May, after actually falling 0.2% the previous month. Food prices have risen just 1% over the past 12 months, though they’re still up about 20% from three years ago.
Average gas prices tumbled 3.6% nationally just from April to May, though they’re 2.2% higher than they were a year earlier. Those declines have continued, with gas averaging $3.45 a gallon Wednesday, down 17 cents from a month ago. Americans didn’t drive as much over the Memorial Day weekend as they have in previous years, reducing demand, and oil prices have fallen.
Overall inflation also slowed last month, with consumer prices unchanged from April to May. Measured from a year earlier, prices rose 3.3%, less than the 3.6% increase a month earlier.
“It’s certainly welcome news,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “It drives home that the inflation challenge in the United States is not as challenging as monetary policy makers believe.”
Later Wednesday, the Fed’s policymakers are expected to reduce their forecast for interest rate cuts by year’s end to two, down from three in their previous forecast in March. Before Wednesday’s mild inflation figures were released, many economists worried that the Fed would predict just one rate cut this year. But most analysts said the inflation slowdown, if it continues, makes two cuts more likely, probably starting in September.
“We think this starts the clock on a potential September rate cut, but the Fed will need to see much more sustained progress in the months ahead to deliver that cut,” Krishna Guha, an analyst at Evercore ISI, said in a note to clients.
In early May, Chair Jerome Powell said the central bank needed more confidence that inflation was returning to its 2% target before it would reduce its benchmark rate. Fed officials said in recent weeks that they needed to see several consecutive months of lower inflation to gain that confidence.
Small-business people are less likely to say the costs of their parts and raw materials are rising than they were a year ago, according to surveys, suggesting that they’re facing less pressure to pass on higher expenses.
Read the full report from the Associated Press here.