Key Inflation Gauge Drops Slightly But Sticks at More Than Double Fed’s Target

A key inflation gauge dropped slightly in May but remains stuck at a level that is more than double the target set by the Federal Reserve.

The Fed’s preferred inflation gauge, the so-called core Personal Consumption Expenditures (PCE) price index, is heavily relied on by the Federal Reserve when setting interest rates.

Despite inching down last month, it has remained elevated near multi-decade highs at a level more than twice the central bank’s inflation target.

It suggests that the Fed’s fight to relieve price pressures will be drawn out.

The PCE price index rose by 4.7 percent year-over-year in May, the Commerce Department reported on Thursday.

While that’s a slight decline from the prior month’s 4.9 percent pace of growth and roughly in line with analysts’ estimates, it’s more than double the 2 percent inflation target aimed for by the U.S. central bank.

On a month-over-month basis, core PCE rose at 0.3 percent in May for the fourth month in a row, suggesting inflationary pressures remain stuck in high gear.

“Inflation appears to be cooling, but it may be a mirage as sequential momentum remains strong,” Gregory Daco, Chief Economist at EY-Parthenon, said in a tweet.

Daco was referring to the elevated monthly inflation readings.

Julian Bridgen, the co-founder of Macro Intelligence 2 Partners, said the year-over-year PCE inflation data is showing signs of easing and is cause for some optimism, though he expects the inflation problem will continue to bedevil the U.S. economy for longer.

“PCE is starting to lose a little momentum, so I think for the first time in two years I’m a little bit more upbeat on the inflation outlook,” he told Fox Business in an interview.

“Doesn’t mean I think this is going away and, unfortunately, I don’t.

“I think it’s going to remain much more sticky than the Fed thinks.”

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The Fed has gradually shifted its view on inflation, initially expecting it to be a temporary spike that would soon pass but later coming to see it as persistent and problematic, prompting the central bank to embark on a rate-hiking cycle in a bid to tame runaway prices.

During a Wednesday panel discussion at the European Central Bank’s annual policy forum in Sintra, Portugal, Federal Reserve Chair Jerome Powell said that the Fed is determined to keep hiking rates to bring down inflation, even if it means slowing the economy.

While the Fed chief said he believes there are “pathways” to tighten monetary policy without hurting the job market—a so-called “soft landing”—he admitted there’s “no guarantee we can do that.”

Powell said that engineering a soft landing has “gotten harder” given that geopolitical turbulence has put additional upward pressure on food and energy prices.

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By Nick R. Hamilton

Nick has a broad background in journalism, business, and technology. He covers news on cryptocurrency, traditional assets, and economic markets.

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