Wall Street cheers as Fed’s favorite inflation gauge falls to lowest level in years

A closely watched price measure by the Federal Reserve suggests inflationary pressures in the U.S. economy are continuing to ease.

The Commerce Department report on Friday showed consumer prices held steady from April to May, the weakest performance in more than four years. Compared to a year ago, prices rose 2.6% last month, slightly less than in April.

Excluding volatile food and energy prices, so-called core inflation rose 0.1% between April and May, the smallest increase since spring 2020, when the pandemic erupted and paralyzed the economy. And compared with a year earlier, core prices rose 2.6% in May, the smallest increase in more than three years.

In fact, physical goods prices fell 0.4% from April to May. Gasoline prices, for example, fell 3.4%, furniture prices fell 1%, and prices for recreational goods and vehicles fell 1.6%. On the other hand, prices for services, which include items such as restaurant meals and airfare, rose 0.2%.

Stocks rose on Wall Street on Friday and headed for their fourth weekly gain following the release. The S&P 500 index rose 0.2% and is on track to post a fourth consecutive weekly gain and another all-time high. The Nasdaq Composite rose 0.2% and is also on track for a record.

The Dow Jones Industrial Average was up 93 points, or 0.2%, as of 11:10 a.m. ET.

Is it close to 2%?

The latest figures will likely be welcomed by Federal Reserve policymakers, who have said they need to be confident that inflation is sustainably slowing toward their 2% target before they begin cutting interest rates. Rate cuts by the Fed, which most economists believe could begin as early as September, would eventually lead to lower borrowing rates for consumers and businesses.

“If the trend we saw this month continues consistently for another two months, the Fed could finally have the confidence to cut rates in September,” Olu Sonola, head of U.S. economic research at Fitch Ratings, wrote in a research note.

The Federal Reserve raised its benchmark rate 11 times in 2022 and 2023 as it sought to stem the worst stretch of inflation in four decades. Inflation has cooled substantially from its peak in 2022. Still, average prices remain well above where they were before the pandemic, a source of frustration for many Americans and a potential threat to President Joe Biden’s reelection bid.

During Thursday night’s presidential debate, Donald Trump attacked Biden’s record on inflation. The likely Republican nominee claimed that Biden inherited low inflation rates when he took office in January 2021, but that prices “exploded under his leadership.”

While inflation was, indeed, ultra-low at the start of Biden’s presidency, that was largely because the nation was still recovering from the brutal Covid recession, which flattened the economy. Once the economy began to rebound at an unexpected speed, causing severe shortages of goods and labor, inflation soared.

Friday’s price figures added to signs that inflationary pressures are continuing to ease, albeit more slowly than last year.

Price increase measures

The Federal Reserve tends to favor the inflation gauge the government issued on Friday (the personal consumption expenditures price index) over the better-known consumer price index. The PCE index attempts to account for changes in the way people shop when inflation rises. It can capture, for example, when consumers switch from expensive national brands to cheaper commercial brands.

Like the PCE index, the latest consumer price index showed inflation easing in May for a second straight month, bolstering hopes that the price acceleration that occurred earlier this year has passed.

The sharply higher borrowing costs that followed the Federal Reserve’s rate hikes, which pushed its key rate to a 23-year high, were widely expected to tip the nation into recession. Instead, the economy has continued to grow and employers have kept hiring.

But the economy’s momentum appears to have faltered lately, with higher rates appearing to weaken some consumers’ ability to continue spending freely. On Thursday, the government reported that the economy expanded at a 1.4% annual pace between January and March, the slowest quarterly growth since 2022. Consumer spending, the main driver of the economy, grew at a tepid 1.5% annual rate.

Friday’s report also showed that consumer spending and income rose in May, encouraging signs for the economy. Adjusted for inflation, consumer spending (the main driver of the US economy) rose 0.3% last month after falling 0.1% in April.

Revenue net of taxes, also adjusted for inflation, increased 0.5%. This is the largest increase since September 2020.

Sign up for the Fortune Next to Lead newsletter to receive weekly strategies on how to get to the top office. Sign up for free.

Leave a Comment