Key Inflation Gauge Cooled in May, a Glimmer of Good News for the Fed

The Federal Reserve’s preferred inflation measure cooled in May, mildly encouraging news that could give policymakers confidence that price increases are still moderating — though progress remains slow.

Although inflation has been coming down notably overall in recent months, Fed officials have been closely tracking the “core” measure of the Personal Consumption Expenditures index that cuts out grocery and gas costs, which they think offers a better signal of how price increases might shape up in the months and years to come. That measure has been stuck at an elevated level and has been coming down only haltingly.

It moderated — but not drastically — in May. Prices climbed 4.6 percent from the previous year, excluding food and fuel. That compared with a forecast for a 4.7 percent increase, which would have matched the previous month.

Core inflation has hovered between 4.6 and 4.7 percent since December 2022, below its 5.4 percent peak last year but still well above the Fed’s 2 percent inflation goal. Its stubbornness has been a source of concern for policymakers who have spent more than a year raising interest rates to try to wrestle down rapid inflation.

Progress in fighting overall inflation has been swifter and more encouraging. The Personal Consumption Expenditures index measure that includes food and gas climbed 3.8 percent in the year through May, in line with economists’ forecasts — and below 4 percent for the first time since April 2021. That measure peaked at about 7 percent last summer.

More moderate overall inflation is taking some pressure off consumers: Cheaper tanks of gas and less rapid price increases in the grocery aisle are helping paychecks go further. But for officials at the Fed, signs that inflation remains stubborn under the surface have been a reason to worry. Officials believe that they need to wrestle core price increases lower to make sure that the economy’s future is one of modest and steady price increases.

To do that, Fed policymakers have been raising interest rates. Making it more expensive to get a home loan or expand a business restricts the economy’s momentum. By slowing growth and cooling demand, the moves are meant to make it harder for corporations to increase their prices without losing customers.

Policymakers skipped a rate increase at their June meeting after 10 straight moves, but they have signaled that they expect to lift rates beyond their current level of just above 5 percent — perhaps to 5.5 percent by the end of the year. Investors have been betting on only one more move this year, but they increasingly see two rate moves as a possibility.

Jerome H. Powell, the Fed chair, emphasized this week at an event in Madrid that the outlook for how much more rates might move this year is uncertain.

“We’ve all seen inflation be, over and over again, shown to be more persistent and stronger than expected,” Mr. Powell said. “At some point that may change. And I think we have to be ready to follow the data and be a little patient as we let this unfold.”