The Economy

Key Inflation Rate Hit Fed’s Target Level in May

The rise in the core personal consumption expenditures index last month is not expected to change the Fed's policy of gradual rate increases.
William SprouseJune 29, 2018
Key Inflation Rate Hit Fed’s Target Level in May

The personal consumption expenditures (PCE) index ticked up to 0.2% in May as core inflation hit 2%, the Federal Reserve’s long-run target, for the first time since April 2012.

Economists had not expected its key measure of inflation to hit 2% until later this summer, though Fed Chairman Jerome Powell said the inflation rate was welcome, given higher oil prices.

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For the last 12 months, inflation as measured by the PCE index has been 2.3%, the highest rate since March 2012, according to the Commerce Department.

Core PCE, which excludes the volatile food and energy sectors, is the Fed’s preferred inflation gauge, and it rose 2% for the 12 months ending May 31.

The rise in the inflation index is not expected to prompt the Federal Reserve’s Open Market Committee to deviate from its stated policy of gradual interest rate increases. The Fed has forecast two more rate hikes by the end of 2018. It has already raised interest rates twice this year.

key inflation rate“Core PCE was a bit stronger than expected. It is still tame, with the core PCE series at 2% year-over-year, but that is up from 1.5% year-on-year at year-end. [The] momentum is likely still up,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said.

The  increase in inflation came even though consumer spending for April was revised down to 0.5% from 0.6% and consumer spending for May was a lackluster 0.2%. Adjusted for inflation, consumer spending was flat in May.

Experts believe the tight U.S. labor market and lower tax rates will buttress consumer spending going forward.

The Commerce Department said personal income increased 0.4% in May, primarily due to increases in wages and salaries, personal dividend income, and nonfarm proprietors’ income. Savings rose to $482 billion, up from $448 billion in April, with the savings rate rising to 3.2%.

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