US inflation falls for first time in more than half a year

The US Department of Commerce just announced that the PCE last month was unchanged compared to April. Compared to the same period in 2023, the PCE increased by 2.6%, lower than the 2.7% of the previous month.

Excluding food and energy prices, core inflation rose 0.1% in May from April, the smallest increase since spring 2020. Compared to the same period last year, the index rose 2.6%, the lowest in more than three years.

The Fed tends to favor the PCE over the consumer price index (CPI) when measuring inflation because the PCE takes into account changes in how people spend when prices rise. For example, it can capture when consumers switch from expensive brands to cheaper goods.

Scott Anderson, chief US economist at BMO Capital Markets, called the new report “very friendly” to the Fed. “It helps keep the case for a rate cut in September alive, while also increasing investor confidence that moderate economic growth can be sustained even if interest rates stay high for longer,” he said.

Along with inflation, the growth momentum of the economy seems to weaken. On June 27, the US government’s first quarter GDP reached 1.4%, the slowest quarterly level since 2022. Consumer spending, the main driver of the economy, increased slightly by 1.5%.

Economists say signs of slowing inflation and growth could warrant at least one Fed rate cut this year. Rates are at a 23-year high, after 11 hikes in an effort to tame inflation.

If this inflation trend continues to stabilize over the next two months, the Fed could finally have enough confidence to cut interest rates in September, said Olu Sonola, head of US economics at Fitch Ratings.

According to the CME FedWatch statistical tool, after the May FCE was announced on June 28, the probability that investors predicted the Fed would cut interest rates in September increased to 61.1% compared to 59.5% on June 27.