U.S. inflation eased in May, signaling that an early-year price uptick has passed
U.S. inflation eased last month in a hopeful sign that an uptick in prices from earlier 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 per cent from April to May, the government said Wednesday.
That was down from 0.3 per cent the previous month and was the smallest increase since October. Measured from a year earlier, core prices rose 3.4 per cent, below last month’s 3.6 per cent increase.
Fed officials are scrutinizing each month’s inflation data to assess their progress in the fight against rising prices. Even as overall inflation moderates, necessities such 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 travelling, eating out and spending on entertainment.
The Fed has kept its key rate unchanged for nearly a year after rapidly raising it in 2022 and 2023 to fight the worst bout of inflation in four decades. In turn, those higher rates have led to more expensive mortgages, auto loans, credit cards and other forms of consumer and business borrowing.
Though inflation is now far below its peak of 9.1 per cent in mid-2022, it remains above the Fed’s target level.
Fed’s next interest rate decision comes today
The Fed will make its next interest rate announcement on Wednesday afternoon. The officials are poised to leave their benchmark interest rate unchanged at a 23-year high of about 5.3 per cent.
The longer the Fed keeps borrowing costs high, the more it risks weakening the economy too much and potentially causing a recession. Yet if it cuts rates too soon, it risks reigniting inflation. Most of the policymakers have said they think their rate policies are slowing growth and should curb inflation over time.
Inflation had fallen steadily in the second half of last year, raising hopes that the Fed could pull off a “soft landing,” whereby it manages to conquer inflation through higher interest rates without causing a recession. Such an outcome is difficult and rare.
But inflation came in unexpectedly high in the first three months of this year, delaying rate cut hopes and possibly jeopardizing a soft landing.
In early May, Chair Jerome Powell said the central bank needed more confidence that inflation was returning to its target before it would reduce its benchmark rate.
Powell noted that it would likely take more time to gain that confidence than Fed officials had previously thought. Several officials have said in recent weeks that they needed to see several consecutive months of lower inflation.
