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U.S. inflation eased to 2.6 percent in the year through May, according to the measure the Federal Reserve uses to set its target for price pressures, leaving the central bank on track for at least one rate cut this year.
Data released Friday by the Bureau of Economic Analysis on its personal consumption expenditures index matched economists’ expectations that U.S. inflation would ease slightly from 2.7 percent in April.
The “Core” PCE, which ignores changes in food and fuel prices, was 2.6 percent, in line with expectations of economists polled by Reuters for a decline of 0.2 percentage points from 2.8 percent in April. It was the lowest reading since March 2021.
The Fed’s target for the PCE index is 2 percent per year.
The month-on-month average remained flat, while core prices rose by only a tenth of a percentage point. These figures are in line with the annual target of 2 percent.
The next rate-setting vote by Fed officials is July 31. Markets are expecting about two quarter-point rate cuts this year, with a slightly more than 50 percent chance that the first will come in September — the final policy decision before the Nov. 5 presidential election.
However, Cornell University professor Eswar Prasad described a move in September as “a low-probability proposition given the gradual pace at which inflation is declining.”
“Given current trends, there is a greater chance of a cut later this year,” he said.
Although inflationary pressures have eased in recent months, disappointing data at the start of the year prompted the central bank to postpone the start of a cycle of interest rate cuts.
Ryan Sweet, chief U.S. economist at Oxford Economics, said the reading was “encouraging news” and that while the Fed was far from “ready to declare victory” – the labor market slowdown was becoming an increasingly important factor in its decision-making.
“The Fed needs to put a needle in the needle to bring inflation down, but they shouldn’t keep rates too high for too long and cause stress in the labor market,” Sweet said.
Ajay Rajadhyaksha, Global Chair of Research at Barclays Bank, said the inflation figures for May were encouraging, but it was important to remember it was only one month. Still, he said “the only question mark” in his mind was about a potentially sharp slowdown in the labor market.
“Nothing focuses a central banker’s mind more than the labor market starting to fall out of bed,” he said.
Brett Goldstein, senior vice president of U.S. pension portfolio management at Franklin Templeton Investment Solutions, said the data “merit a muted reaction” as it was in line with expectations.
“The market is trying to figure out if there’s going to be a rate cut in September. There are exits on the way to September, and we just passed an exit,” he said.
US stocks briefly hit intraday record highs during the morning session, but the rally lost steam. The S&P 500 closed 0.4 percent lower on the day, while the Nasdaq Composite fell 0.7 percent.
A rally in government bonds earlier in the session petered out as yields, which move inversely to prices, rose. The yield on the policy-sensitive two-year Treasury note hit a two-week low after the data release, but reversed course to trade 0.03 percentage point higher at 4.75 percent on Friday afternoon. The yield on the benchmark 10-year Treasury jumped 0.09 percentage point to a two-week high of 4.38 percent.
Additional reporting by Martha Muir