By Alicia Wallace, CNN Business

An inflation gauge closely followed by the Federal Reserve showed consumer prices remained flat in May, indicating that inflation had yet to abate despite the central bank’s initial efforts to cool the economy.

The monthly Personal Consumption Expenditures price index increased by 6.3% for the year ended in May, the Commerce Department reported Thursday. That matches April’s reading and suggests that price hikes have taken a breather since hitting a 40-year-high of 6.6% in March.

The core PCE inflation measure, which strips out volatile food and energy costs, rose 4.7% from the year before, down from 4.9% in April. The Fed focuses on inflation derived from this particular index to help inform its policymaking decisions.

Core PCE has been ticking downward since it hit 5.3% in February, but still remains at historically high levels.

Month over month, prices rose 0.6% in May — higher than April’s 0.2% growth rate but lower than March’s 0.9% increase — while core prices increased 0.3% for the fourth consecutive month.

Economic forecast shows NC economy experiencing a pullback, including in job market

First monthly decline

When accounting for inflation, consumer spending fell by 0.4% from April. That’s the first month-on-month decline in real consumption this year — and it’s unlikely to be the last, said Cailin Birch, global economist at the Economist Intelligence Unit.

Pullbacks in spending and, especially, consumers’ inflation expectations will continue to weigh heavily into the Fed’s future decision-making process on further rate hikes, she said.

The central bank abandoned its “easy money” policy earlier this year and launched a series of aggressive rate hikes in an attempt to tackle rising inflation and cool the economy. In March, the Fed raised rates for the first time since 2018, hiking its benchmark lending rate by 25 basis points, or 0.25%. That was followed by an increase of 50 basis points a few weeks later on May 4, and a 75-basis point hike earlier this month.

Birch said her firm expects the Fed to revert to increases of 50 basis points in the coming months as it attempts to balance mixed economic data and respond without triggering a recession.

Report: The U.S. economy has slowed – a recession coming?

Economic growth has slowed

The final first-quarter GDP reading, released on Wednesday, showed US economic growth contracted by 1.6%. And separately, mortgage rates fell to 5.7% from 5.81% the previous week, according to Freddie Mac data released Thursday.

Federal Reserve Chairman Jerome Powell has repeatedly conveyed that the central bank’s efforts affect demand but not necessarily supply, while acknowledging the latter’s outsized effect on rising prices.

Supply factors — notably, global supply chain disruptions and ongoing labor shortages — were found to be responsible for more than half of the difference between the 12-month PCE inflation and pre-pandemic inflation levels, according to research released this month by the Federal Reserve Bank of San Francisco.


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