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U.S. Inflation Steady in May as Goods Prices Drop

Quiver Editor

U.S. inflation remained unchanged in May as a modest increase in the cost of services was offset by the largest drop in goods prices in six months, moving the Federal Reserve closer to potentially cutting interest rates later this year. The Commerce Department's report on Friday indicated that consumer spending rose marginally last month, raising optimism for a "soft landing" where inflation falls without triggering a recession or a significant rise in unemployment. Traders increased their bets on a Fed rate cut in September following the report.

The flat reading in the personal consumption expenditures (PCE) price index for May followed an unrevised 0.3% gain in April. Goods prices dropped 0.4%, marking the most significant decline since November, with notable decreases in recreational goods, vehicles, furnishings, and durable household equipment. Gasoline and other energy goods prices fell by 3.4%, and clothing and footwear were also cheaper. Meanwhile, the cost of services rose by 0.2%, driven by higher prices for housing, utilities, and healthcare, although financial services and insurance costs declined by 0.3%.

Market Overview:
  • U.S. monthly inflation unchanged in May.
  • Goods prices see largest drop in six months.
  • Services costs rise, led by housing and utilities.
Key Points:
  • PCE price index flat; goods prices drop 0.4%.
  • Core PCE edges up 0.1%; annual rise at 2.6%.
  • Consumer spending increases 0.2%; personal income up 0.5%.
Looking Ahead:
  • Inflation trends could influence Fed rate cut decisions.
  • Ongoing monitoring of consumer spending and labor market.
  • Anticipation of second-quarter growth estimates below 2%.

In the 12 months through May, the PCE price index increased by 2.6% after a 2.7% rise in April, aligning with economists' expectations. The core PCE price index, which excludes volatile food and energy components, edged up by 0.1% in May, the smallest gain since November. Core inflation rose by 2.6% year-on-year, marking the smallest advance since March 2021. The Federal Reserve, which tracks PCE price measures for monetary policy, sees monthly inflation readings of 0.2% over time as necessary to return inflation to its 2% target.

Consumer spending, accounting for more than two-thirds of U.S. economic activity, increased by 0.2% in May following a 0.1% rise in April. Higher borrowing costs, dwindling savings, and inflation fatigue have been restraining spending, but it remains supported by a resilient labor market generating strong wage gains. Personal income rose by 0.5% in May, with wages shooting up by 0.7%. The saving rate increased to 3.9% from 3.7% in April, with inflation-adjusted spending rebounding by 0.3%. This rise in real consumer spending bodes well for consumption growth this quarter, despite a sharp slowdown in the first quarter.

About the Author

David Love is an editor at Quiver Quantitative, with a focus on global markets and breaking news. Prior to joining Quiver, David was the CEO of Winter Haven Capital.

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