Fed’s Preferred Inflation Measures Cool as Spending Stalls
The Federal Reserve’s preferred inflation measures have cooled in recent months, as consumer spending has stalled and the economic recovery has slowed. The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, rose 1.6% in May from a year earlier, down from 1.8% in April.
Inflation Slowing Despite Stimulus
The slowdown in inflation comes despite the Fed’s efforts to stimulate the economy with low interest rates and trillions of dollars in asset purchases. The Fed has kept its benchmark rate near zero since the start of the pandemic, and has purchased trillions of dollars in Treasury and mortgage-backed securities in an effort to keep borrowing costs low and support the economy.
Consumer Spending Stalls
The slowdown in inflation is largely due to a slowdown in consumer spending. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, has been sluggish in recent months. Personal consumption expenditures (PCE) rose just 0.3% in May, the slowest pace since January.
Weak Job Market
The weak job market is also contributing to the slowdown in inflation. The unemployment rate remains elevated at 6.1%, and the number of people filing for unemployment benefits is still high. The weak job market is weighing on consumer spending, as households are reluctant to spend when their incomes are uncertain.
Rising Prices
Despite the slowdown in inflation, some prices are still rising. Prices for goods such as food, energy, and housing have been rising in recent months, as demand has outpaced supply. The prices of some commodities, such as lumber and copper, have also been rising due to strong demand and supply constraints.
Risks to Inflation
The Fed is closely monitoring the inflation situation, as it could pose a risk to the economic recovery. If inflation rises too quickly, the Fed could be forced to raise interest rates to keep it in check. This could slow the recovery, as higher interest rates make it more expensive for businesses and households to borrow money.
Outlook
The outlook for inflation remains uncertain. The Fed is likely to keep interest rates low for the foreseeable future, and is likely to continue its asset purchases to support the economy. However, the Fed will be closely monitoring the inflation situation, as it could pose a risk to the economic recovery.