Core Inflation in U.S. Shows Signs of Life While Sentiment Cools

(Bloomberg) -- The Federal Reserve’s preferred measure of underlying U.S. inflation showed signs of picking up in May toward the central bank’s goal, while gauges of consumer and business sentiment slipped, offering mixed signs on the economy as policy makers weigh an interest-rate cut at their meeting in late July.

The core personal consumption expenditures price gauge, which excludes food and energy, rose 0.2% from the prior month and 1.6% from a year earlier, according to a Commerce Department report Friday. The annual gain was just above the median estimate in a Bloomberg survey, and the three-month annualized increase advanced to about 2%, a five-month high.

Separate reports on Friday showed U.S. consumer sentiment cooled in June from an eight-month high, while an index of Chicago-area business dropped to the lowest in more than three years. Also, a Chicago Fed gauge of the Midwest economy fell to the lowest since 2010.

While Friday’s figures alone are unlikely to spur the Fed to act one way or another, a sustained flow of positive economic news in coming weeks could persuade policy makers to keep interest rates unchanged, despite pressure from financial markets and President Donald Trump.

Stronger consumer spending and higher incomes should support future growth as the expansion becomes the longest in U.S. history in July. Stocks rose Friday, set to cap the best month since January. Treasuries fell and the dollar weakened.

“The trend seems to be getting back toward the pace that the Fed will be more comfortable with,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, said of inflation. “The question really is how patient they want to be.”

There are other important indicators still to come before the Fed’s next meeting on July 30-31, including employment data and developments from the G20 meetings between the U.S. and China in Japan.

Purchases, which make up the majority of the economy, rose 0.4% from April, slightly below estimates, following an upwardly revised 0.6% gain in April. Personal income increased 0.5% for a second month, topping forecasts, though wages and salaries climbed at the slowest pace in six months.

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The implications of Friday’s data on economic growth differed among economists. JPMorgan & Chase Co. lowered its second-quarter forecast to an annual expansion pace of 1.25% from 1.75%, citing “disappointing” May consumer spending and trade data.

At the same time, Morgan Stanley increased its tracking estimate to 2.2% from 2%, citing upward revisions to real spending in April and a “broadly unchanged inflation reading.”

Earlier this week, Fed Chairman Jerome Powell said recent data show that the inflation undershoot “may be more persistent than we had hoped.” In May, he said officials viewed muted inflation as likely transitory.

Fed officials in their quarterly forecasts last week lowered their outlook for headline PCE inflation to 1.5% this year and to 1.8% for core PCE prices.

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• The broader PCE price gauge, which the Fed officially targets for 2% inflation, rose 0.2% from the prior month and was up 1.5% from a year earlier, matching the median estimates in a Bloomberg survey.
• Inflation-adjusted spending rose 0.2% for a second month, which was less than estimated, though the April figure reflected an upward revision. The gain in May was driven by new motor vehicles as well as spending on food services and accommodations, according to the report.
• The personal saving rate held at 6.1%, matching the lowest since November.
• Adjusted for inflation, disposable income rose 0.3%, the fastest pace this year.

--With assistance from Chris Middleton, Sophie Caronello and Ryan Haar.

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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