Fed’s Favorite Inflation Gauge Remains High, but Gains Slowed in May

Inflation climbed in May at the fastest pace since 2008, as businesses reopening from pandemic shutdowns and strong demand continued to push prices higher, fueling anxiety among some economists and debate in Washington.

The Personal Consumption Expenditures inflation index increased 3.9 percent in the year through May, in line with what economists in a Bloomberg survey had anticipated. That came on the heels of a big annual reading in April and kept year-over-year inflation at levels not seen in more than a decade.

But the May inflation reading might be the high point.

On a monthly basis, the measure climbed 0.4 percent, compared with a 0.5 percent projection. That was slightly more muted than the prior month, suggesting that although prices are up steeply this year and continue to grow more rapidly than normal, the speed of the increase is moderating somewhat. Plus, the annual numbers have been measured against very weak readings from spring 2020, and that so-called base effect should begin to fade.

“May will be the peak — probably — for the year-over-year numbers,” said Jim O’Sullivan, the chief U.S. macro strategist at TD Securities. “Not to say that it is going to suddenly plunge.”

The data came alongside other figures that showed personal spending held steady in May even as people spent less money on goods, disappointing economists’ expectations for a continued pickup in consumption. Spending on services ticked higher as households opened their wallets for recreation, hotel rooms and restaurant meals — but that rebound was not enough to offset the decline in merchandise purchases, which was led by a drop in motor vehicle and parts spending. Cars have been hard to come by cheaply, in part because a shortage of computer chips has limited the supply of new vehicles.

Together, the data points paint a picture of an unusual economic rebound, one that is happening in fits and starts as production bottlenecks dampen buying and higher prices detract somewhat from the strong financial situation of many American households. Overall, consumers are flush with savings after months in lockdown and repeated checks from the government.

The spending stagnation reflects “the fading of the impact of the stimulus payments,” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a note after the release. But he said it was nothing to worry about. “We expect the underlying upward trends to re-emerge over the next couple months.”

The inflation outlook is especially uncertain. The May price increases extended to the core index. Stripping out fuel and food, which are volatile, the inflation gauge jumped 3.4 percent over the past year, the quickest pace since 1992.

Republicans have used the rising prices as a talking point to criticize President Biden’s stimulus spending and to push back on his infrastructure plans, but the White House and top officials at the Federal Reserve have maintained that the recent pickup is more likely to prove short-lived.

“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” Jerome H. Powell, the Fed’s chair, said during congressional testimony earlier this week.

The personal consumption index is important because it is the Fed’s preferred inflation gauge and how it measures its official goal, which is to average 2 percent annual price gains over time. Congress has charged the central bank with maintaining stable prices and fostering maximum employment.

“The bad news is that it’s there,” Diane Swonk, the chief economist at Grant Thornton, said of inflation. “The Fed had underestimated the strength of the flare and the amount of time.”

But central bank officials say they are watching carefully to make sure that the pickup doesn’t last.

They are now debating how to achieve their goals as the economy emerges from the pandemic short on jobs but high on demand. They are beginning to discuss when and how to scale back their program to buy $120 billion in bonds each month, which is meant to keep many kinds of borrowing cheap.

The central bank has also held its policy interest rate at rock bottom since March 2020. It released new economic projections last week showing that more than half of its officials now expect to raise interest rates by the end of 2023.

“The key question for the Fed” is whether the recent jump in prices will increase wages and raise expectations for inflation, Mr. Shepherdson wrote, which could make inflation more entrenched. “The jury is out, and a clear verdict is unlikely before late fall.”

But there are some signs that the price gains will not last. Consumers in a University of Michigan survey expect prices to pick up this year before moderating over the next five. Data released Friday showed that while short-term inflation expectations in the survey have increased so far this year, they were less pronounced in June than in May.

“I do believe that this is likely to be transitory,” Eric Rosengren, the president of the Federal Reserve Bank of Boston, said during an interview with Yahoo Finance after the numbers were released on Friday.

“Planes, hotels, rental car — all those prices are up, but they’re up relative to very low levels during the pandemic,” Mr. Rosengren added. “It will continue maybe a little longer than we were expecting, but I think the best guess going forward is that when we get into next year, we’re going to be seeing inflation just barely above 2 percent.”

Ben Casselman contributed reporting.