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The Fed’s favorite inflation gauge shows prices rose just 0.1% last month

<i>Gary Hershorn/Corbis News/Getty Images</i><br/>People eat at tables on the sidewalk outside Prince St. Pizza on June 25 in New York City.
Gary Hershorn/Corbis News/Getty Images
People eat at tables on the sidewalk outside Prince St. Pizza on June 25 in New York City.

By Alicia Wallace, CNN

Minneapolis (CNN) — The Federal Reserve’s preferred inflation gauge cooled off last month, and consumers reined in some spending as the economy slows, according to data released Friday by the Commerce Department.

The Personal Consumption Expenditures price index rose 3.8% for the 12 months ended in May, which was down from the revised 4.3% annual increase seen in April, according to the report.

The headline PCE index is at its lowest annual level since April 2021. On a monthly basis, prices were up a mere 0.1%.

Personal spending ticked up by just 0.1%, a more moderate pace than April’s revised 0.6% growth rate. When adjusting for inflation, consumer spending was flat.

In May, consumers continued to put their dollars toward services — particularly for medical care and travel — while cutting back on buying goods, especially bigger-ticket items like cars and appliances.

The core PCE index, which is more closely watched because it strips out volatile food and energy prices, inched down to 4.6% from 4.7%, landing at its lowest point since October 2021. Although the index slightly retreated, the latest report showed that core services cooled to an annualized rate of 2.8%, the lowest since July 2022, Diane Swonk, KPMG’s chief economist, told CNN.

“One month does not a trend make … but we’re moving in the right direction on momentum, even though the year-over-year [data remains elevated],” she said.

On a monthly basis, the core index was up 0.3%.

Consumers refill the coffers

The data in recent months shows a gradual cooling in consumer spending, Gregory Daco, chief economist at EY-Parthenon, told CNN.

“It’s not a retrenchment, but it is a notable and visible cooling of consumer spending activity,” he said.

Friday’s report showed that wage growth helped to lift personal incomes in May by 0.4% on a nominal basis and by 0.3% when accounting for inflation.

With fewer dollars flowing outward last month, consumers were able to sock away more money: The rate of savings as a percentage of disposable income rose to 4.6%, an increase of 0.3 percentage points from April. The saving rate has been above 4% since the beginning of the year, marking a bounce back from the 17-year low of 2.7% hit last summer when post-pandemic pent-up demand was on full display.

“The slowing in consumer spending and inflation in May points to an economy losing momentum,” Abby Omodunbi, PNC senior economist, wrote in a note Friday. “While consumers and businesses continue to show remarkable resilience, economic headwinds are increasing.”

Forecasts for a mild recession remain on table, but some economists and government officials, such as Treasury Secretary Janet Yellen, believe a soft landing can’t be ruled out entirely.

On Friday, when speaking in New Orleans, Secretary Yellen said she believes that inflation can continue to come down without expense to the robust economic recovery following the pandemic.

“For a year now, we have heard our fair share of predictions about an imminent recession — with forecasters projecting one by the end of 2022, then by the start of 2023, then by the middle of this year,” Yellen said, according to prepared remarks.”But our economy has proven more resilient than many had thought. I continue to believe that there is a path to reducing inflation while maintaining a healthy labor market.

She added: “Without downplaying the significant risks ahead, the evidence that we’ve seen so far suggests that we are on that path.”

Next steps for the Fed

The PCE indexes are part of the Personal Income and Outlays report, which provides a more comprehensive look at shifts in prices, including how consumers respond to them and how much consumers are spending, bringing in and saving.

The report is watched like a hawk by the Fed, which earlier this month opted not to hike its benchmark rate for an 11th consecutive time, instead pausing to review the economic data, banking activity as well as the effects of monetary tightening.

Most Fed officials estimate that two more quarter-point rate hikes will occur this year and most don’t expect inflation to fall down to the central bank’s 2% target until 2025.

“There were no fireworks within the Fed’s favorite inflation report today,” George Mateyo, chief investment officer for KeyBank, wrote in a statement. “Today’s data shows economic resilience and the disinflationary narrative are becoming more evident, but additional proof is needed. Right now, the Fed’s job is not clear cut. While they may not be done with rate hikes, perhaps they don’t have much more work to do.”

While May represented a weak month for services inflation — which Fed officials have zeroed in on as potentially pushing prices higher — there’s a possibility spending could again pick up, Swonk said. She noted that Transportation Security Administration throughput this past Memorial Day exceeded 2019 levels and that vacation-related absences from work are at their highest levels in more than 15 years.

“It was a weak month, but it’s still not enough to leave the Fed completely on the sidelines and feeling like they’re comfortable,” she said. “Because elsewhere in the world, we’ve seen a reacceleration.”

The next critical pieces of information for the Fed are due out at the end of next week, when a trove of labor market data will be released, including the highly anticipated monthly jobs report for June.

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