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U.S. Core Inflation Shows Signs of Life as Fed Weighs Rate Cut

Published Jun 28, 2019 08:30AM ET Updated Jun 28, 2019 08:40AM ET
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U.S. Core Inflation Shows Signs of Life as Fed Weighs Rate Cut

(Bloomberg) -- The Federal Reserve’s preferred measure of underlying U.S. inflation showed signs of picking up in May toward the central bank’s goal, potentially raising the bar for an interest-rate cut when policy makers meet at the end of next month.

The core personal consumption expenditures price gauge, which excludes food and energy, rose 0.2% from the prior month and 1.6% from a year earlier, according to a Commerce Department report Friday. The annual gain was just above the median estimate in a Bloomberg survey, and the three-month annualized increase advanced to about 2%, a five-month high.

Purchases, which make up the majority of the economy, rose 0.4% from April, slightly below estimates, following an upwardly revised 0.6% gain in April. Personal income increased 0.5% for a second month, topping forecasts, though wages and salaries climbed at the slowest pace in six months.

While Friday’s figures alone are unlikely to spur the Fed to act one way or another, a sustained flow of positive economic news in coming weeks could persuade policy makers to keep interest rates unchanged, despite pressure from financial markets and President Donald Trump. Stronger consumer spending and higher incomes should support future growth as the expansion becomes the longest in U.S. history in July.

Earlier this week, Powell said recent data show that the inflation undershoot “may be more persistent than we had hoped.” In May, he said officials viewed muted inflation as likely transitory.

The broader PCE price gauge, which the Fed officially targets for 2% inflation, rose 0.2% from the prior month and was up 1.5% from a year earlier, matching the median estimates in a Bloomberg survey. Policy makers view the core gauge as a better indicator of underlying price trends and have said they’re also aiming for it to rise 2%.

Fed officials in their quarterly forecasts last week lowered their outlook for headline PCE inflation to 1.5% this year and to 1.8% for core PCE prices.

Friday’s report showed inflation-adjusted spending rose 0.2% for a second month, which was less than estimated, though the April figure reflected an upward revision. The gain in May was driven by new motor vehicles as well as spending on food services and accommodations, according to the report.

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  • The personal saving rate held at 6.1%, matching the lowest since November.
  • Adjusted for inflation, disposable income rose 0.3%, the fastest pace this year.

©2019 Bloomberg L.P.

U.S. Core Inflation Shows Signs of Life as Fed Weighs Rate Cut
 

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