While May’s Personal Consumption Expenditures (PCE) showed that headline inflation was unchanged from April, the year-over-year reading declined from 2.7% to 2.6%. Core PCE, the Fed’s preferred method which strips out volatile food and energy prices, rose by less than 0.1% monthly. The year-over-year reading declined from 2.8% to 2.6%, an encouraging drop for the Fed’s mandate of stable prices.
What’s the bottom line? The Fed has been working hard to tame inflation, hiking its benchmark Fed Funds Rate (which is the overnight borrowing rate for banks) eleven times between March 2022 and July 2023. These hikes were designed to slow the economy by making borrowing more expensive and lowering the demand for goods, so pricing pressure and inflation would shrink.
The Fed has held rates steady since last September because inflation had been making good progress lower late last year before stalling in the first quarter of this year. While Fed members have emphasized that they do not expect to cut rates until they’re confident that inflation is moving sustainably towards their 2% target (as measured by annual Core PCE), May’s tamer inflation readings are a welcome sign.