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U.S. inflation eased to 2.6 percent in the year to May, according to the metric the Federal Reserve uses to set its target for price pressures, keeping the central bank on course for at least one rate cut this year.
Friday’s personal consumption expenditure index data, released by the Bureau of Economic Analysis, was in line with economists’ expectations that headline U.S. inflation would fall slightly from April’s 2.7 percent.
“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 0.2 percentage point decline from April’s 2.8 percent. It was the lowest since March 2021.
The Fed’s target for the overall PCE index is 2 percent annually.
The month-on-month prime rate was flat, while core prices edged up by just a tenth of a percentage point – figures that are in line with the 2% annual target.
Fed officials’ next rate-setting vote will take place on July 31. Markets expect about two quarter-per-cent cuts this year, with just over a 50-percent chance the first will come in September — the final policy decision before the Nov. 5 presidential election.
However, Eswar Prasad, a professor at Cornell University, described the September move as “a low-chance proposition given the gradual pace at which inflation is coming down.”
“On current trends, chances are better for a cut later in the year,” he said.
While inflationary pressures have eased in recent months, disappointing data from the start of the year led the central bank to delay the start of its rate-cutting cycle.
Ryan Sweet, chief US economist at Oxford Economics, said the reading was “encouraging news” and – while the Fed was still “far from ready to declare victory” – the slowdown in the labor market was becoming a more important factor in its decision. -creation.
“The Fed needs to thread the needle where they continue to reduce inflation, but not keep rates too high for too long and stress the labor market,” Sweet said.
Ajay Rajadhyaksha, global head of research at Barclays Bank, said the May inflation numbers were encouraging, but it was important to remember that it was just one month. Still, he said the “one question mark” in his mind was a potentially sharp slowdown in the labor market.
“Nothing focuses a central banker’s mind more than a 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 “deserves a muted reaction” because it is in line with expectations.
“The market is trying to find out if there will be a rate cut in September. There are off ramps down the road until September and we just passed the off ramp,” he said.
US stocks briefly hit intraday highs during the morning session, but the rally ran out of steam. The S&P 500 closed 0.4 percent lower today, while the Nasdaq Composite fell 0.7 percent.
A rally in government bonds at the start of the session faded as yields, which move inversely to price, rose. The yield on the currency-sensitive two-year Treasury note hit a two-week low after the data was released, but reversed on Friday afternoon to trade 0.03 percentage points higher at 4.75 percent. The yield on the benchmark 10-year Treasury note jumped 0.09 percentage point to a two-week high of 4.38 percent.
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