The annual pace of US inflation eased last month to its lowest level in more than two years, but lingering price gains will keep pressure on the Federal Reserve to consider additional interest rate increases.
The consumer price index climbed 4 per cent in May from a year earlier, a step down from the 4.9 per cent annual jump registered in April and marking the lowest increase since March 2021. On a monthly basis, consumer prices rose just 0.1 per cent, the data released by the Bureau of Labor Statistics on Tuesday showed.
Once volatile items such as food and energy are stripped out, however, “core” CPI rose another 0.4 per cent in May — matching April’s increase. Compared to the same time last year, core prices are up 5.3 per cent.
The latest read on inflation came just before the Fed begins its two-day policy gathering. The Federal Open Market Committee is widely expected to forego an interest rate increase this week after 10 consecutive moves since March 2022, but keep the door open to further tightening this year if warranted by the data.
In a recent speech Fed governor Philip Jefferson backed the idea of a pause, saying it would give officials time to assess incoming data, the effects of the Fed’s rapid monetary tightening over the past 15 months, and the consequences of the recent turmoil in US regional banks.
Moreover, Jefferson, who was elevated by the Biden administration to be the Fed’s next vice-chair, stressed that a pause in June “should not be interpreted to mean that we have reached the peak rate for this cycle”.
Some officials have signalled they do not think the current level of the federal funds rate, which hovers between 5 per cent to 5.25 per cent, is high enough to damp demand to the degree necessary to tame one of the worst inflationary episodes to hobble the central bank in decades.
Fresh projections from individual officials about the fed funds rate, inflation, growth and unemployment are set to be released on Wednesday alongside the rate decision, and it is widely expected that policymakers will indicate at least one additional quarter-point rate rise this year is necessary.
Economists recently polled by the Financial Times believe the Fed will eventually have to lift the benchmark rate to between 5.5 per cent to 6 per cent. That suggests at least two more quarter point rate rises this year.
The respondents were chiefly concerned about inflation becoming entrenched and even more difficult to root out.
Compared with the previous survey in March, the median estimate of the personal consumption expenditures price index once food and energy costs are stripped out — the Fed’s favoured inflation gauge — moved 0.2 percentage points higher to 4 per cent by year-end. As of April, it registered a 4.7 per cent annual pace, well above the Fed’s 2 per cent target.
Source: Economy - ft.com
