US inflation cools as Fed plots next interest rate move

Federal Reserve officials received an encouraging inflation report Tuesday as a key price index slowed more than expected in May, news that could give policymakers comfort in pausing interest rate increases at their meeting this week.

The consumer price index climbed 4 per cent in the year through May, slightly less than the 4.1 per cent economists had expected and the slowest pace in more than two years. In April, it had climbed 4.9 per cent.

While that remains about twice the rate that was normal before the onset of the coronavirus pandemic in 2020, it is down sharply from a peak of about 9 per cent last summer.

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The fresh data offer the latest evidence that the Fed’s push to control rapid price increases is beginning to work. Fed officials have been raising interest rates since March 2022 to make it more expensive to borrow money, in bid to slow consumer demand, tamp down a strong labor market and ultimately cool rapid inflation. They have lifted borrowing costs for 10 meetings in a row, to just above 5 per cent, and many officials have suggested in recent weeks that they could soon take a pause to give themselves more time to assess how those adjustments are working.

Investors have been betting that Fed officials will leave rates unchanged at their meeting this week, breaking their long streak of increases. But they had also penciled in a small chance that policymakers might lift rates — odds that all but disappeared after Tuesday’s inflation figures. Many investors have also been expecting that Fed officials will restart rate increases in July.

After stripping out food and fuel prices, the closely watched measure of “core” prices picked up 5.3 per cent in May compared with a year earlier. That was slightly higher than the 5.2 per cent economists had expected, but lower than 5.5 per cent the previous month.

Still, there were lingering signs that inflation has staying power. Fed officials also monitor month-to-month changes in prices, particularly for the core index, to get a sense of the recent trends in inflation. That figure continued to pick up at an unusually quick pace in May.

Taken as a whole, the fresh data suggested that while the inflation that has been plaguing consumers and bedeviling the Fed for two years remains stubborn, it is also meaningfully slowing. A cooling economy and a gradually weakening job market could help to further weigh down inflation in the months to come, which could give central bankers confidence that they have lifted borrowing costs enough to bring prices back under control.