The Fed's Top Inflation Gauge Cooled for Two Years in May.

Fed’s Preferred Inflation Gauge Cooled in May to Its Slowest Pace in Two Years. It's a sign that the central bank's rate hikes are having the desired effect. The Federal Reserve's favored inflation metric decelerated in May, reaching its most sluggish yearly rate in a span of two years, indicating that the central bank's tightening measures are achieving the intended outcome of curbing the escalation of prices.

Key TakeAway

• The PCE Cost Index increased a mere 0.1% during the month of May and exhibited a year-over-year rise of 3.8%, marking its most subdued annual pace in a two-year timeframe, indicative of a deceleration in inflation.
• Fundamental prices, excluding the volatile expenses associated with food and energy, advanced 0.3% compared to the preceding month, with a year-over-year increase of 4.6%, which also represents a slowdown from April's rate of 4.7%.
• The personal savings ratio, gauging the proportion of disposable income saved by households rather than expended or invested, remained constant at 4.6%.

The Personal Consumption Expenditures (PCE) Price Index witnessed a mere 0.1% increase in May and demonstrated a 3.8% surge compared to the corresponding period last year, as per the Bureau of Economic Analysis (BEA)'s report on Friday. This marks the most subdued annual pace in a two-year span, suggesting a deceleration in inflation.

Core prices, which exclude the volatile expenses associated with food and energy, observed a 0.3% rise from the previous month and a year-over-year increase of 4.6%, representing a slowdown from April's 4.7% rate. The Federal Reserve aims for a 2% annual rate of core inflation.

Price Advancements by Category

When analyzing different categories, there was a mere 0.1% upturn in prices for goods during May, while prices for services witnessed a 0.3% increase. On an annual basis, goods prices experienced a 1.1% rise, whereas services prices surged by 5.3%. This indicates that inflation in the services sector continues to outpace inflation in the goods sector.

The overall index in May was influenced by declining energy prices. Energy costs plummeted by 3.9% compared to the previous month and displayed a significant 13.4% decline from a year ago. On the other hand, food prices saw a slight increase of 0.1% and were 5.8% higher when compared to May of the previous year.

Stability Maintained in Savings Ratio

The personal accumulation rate, which quantifies the proportion of households' disposable income that is preserved instead of expended or invested, remained unchanged at 4.6%. In recent months, it has rebounded from a nearly unparalleled level of 2.7% during the previous summer, a period when the most substantial inflation in forty years strained household finances.

Implications for Federal Reserve Policy

The deceleration in the rate of inflation serves as an indication that the rate hikes implemented by the Federal Reserve are producing the intended outcome, potentially leading to a more accommodative approach from policymakers at the central bank. However, it is important to note that inflation persists considerably higher than the central bank's targeted 2% threshold. Traders, as per CME Group, are currently forecasting an 87% likelihood of an additional 25 basis points (bps) rate hike during the Federal Reserve's upcoming policy meeting in July.