In more than six months, US inflation drops for the first time

The personal consumption expenditures (PCE) index remained unchanged in May, marking the first time since November 2023. This data strengthens the case for a potential rate cut by the Federal Reserve in September. The US Department of Commerce revealed that the PCE for last month showed no growth compared to April, with a 2.6% increase from the same period in 2023, slightly lower than the previous month’s 2.7% rise.

When excluding food and energy prices, core inflation inched up by 0.1% in May from April, the smallest increase seen since spring 2020. The index rose by 2.6% when compared to the same period last year, representing the slowest increase in over three years. The Fed usually leans towards the PCE rather than the Consumer Price Index (CPI) for measuring inflation, as it considers changes in consumer spending habits in response to fluctuating prices.

Scott Anderson, BMO Capital Markets’ chief US economist, described the new report as “very friendly” towards the Fed. He mentioned that the data maintains the argument for a rate cut in September while boosting investor confidence in sustained moderate economic growth, even if interest rates stay elevated.

Concerns about inflation and slowing economic growth have been growing. The US government’s first-quarter GDP for 2023 indicated a 1.4% growth, marking the slowest quarterly level since 2022. Consumer spending, a vital component of the economy, experienced a slight 1.5% increase. Economists believe that the signs of decelerating inflation and growth may warrant at least one Fed rate cut this year, as rates remain at a 23-year peak after 11 hikes to counter inflationary pressures.

If the current trend of stabilized inflation continues over the next couple of months, the Fed may gain the confidence required to cut interest rates in September. Olu Sonola, head of US economics at Fitch Ratings, mentioned that this data could allow the Fed to take action in September. Following the announcement of the May PCE data on June 28, the probability of a Fed rate cut in September rose to 61.1% according to the CME FedWatch statistical tool, up from 59.5% on June 27.