May Inflation Report: Inflation Continues to Cool, Offering Relief to Consumers

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 percent last summer.

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 a 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 percent, 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 — a possibility that all but disappeared after Tuesday’s inflation figures. Even so, many investors continue to expect that Fed officials will restart rate increases in July.

“They are probably feeling a little bit relieved,” Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, said. The report included both encouraging and discouraging news for policymakers, she said: “It lets them pause, but it keeps them pretty firmly on track” to raise rates again in the future.

Taken as a whole, the 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 would give central bankers confidence that they have lifted borrowing costs enough to bring prices back under control.

The report showed that a closely watched inflation measure that strips out food and fuel prices to give a sense of underlying trends continued to slow in May on an annual basis. That “core” price index rose 5.3 percent in May compared with a year earlier. That was above the 5.2 percent economists had expected, but down from 5.5 percent the previous month.

That cooling comes as costs for some key services climb more slowly or even decline. Rental inflation has long been expected to cool off, and that is beginning to happen. Airfares came down sharply last month, and a range of recreation-related purchases — from movie tickets to pet care — moderated in price.

Still, inflation showed some 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.

Some services continue to climb quickly in price, from car insurance to moving expenses and hotel rates. And price increases for goods excluding motor vehicles remained positive, instead of subtracting from inflation as some economists have been expecting.

“It’s possible firms have gotten used to raising prices,” Ms. Rosner-Warburton said.

Fed officials try to keep inflation at 2 percent on average over time, using a different but related measure — the Personal Consumption Expenditures index. The Consumer Price Index measure comes out a few weeks earlier and contains data that feeds into the Fed’s preferred measure, which is why investors watch it so closely for a signal of where inflation is heading.

The central bank’s two-day meeting starts Tuesday and will conclude Wednesday afternoon, when officials are scheduled to release their interest rate decision. That announcement will be accompanied by a fresh set of economic projections — the first ones central bankers have released since March. Jerome H. Powell, the Fed chair, is scheduled to give a news conference to explain both the decision and the outlook.

Investors are likely to follow his remarks even more carefully than usual, because the complicated nature of today’s economy makes it difficult to guess where policy is headed.

Officials are trying to strike a delicate balance: They want to slow the economy enough to make sure that inflation is fully stamped out, but without hitting the brakes so hard that growth grinds to a halt and workers unnecessarily lose jobs.

Calibrating policy is difficult. Changes in interest rates take months, or even years, to have their full effect, so the Fed’s rate increases since early 2022 — the steepest since the 1980s — are still playing out. Central bankers have not fought inflation this intense since the early 1980s, so they have little recent experience to use as a guide.

Plus, recent economic data have offered a mixed picture. Hiring has been surprisingly resilient, and consumer spending has held up. But surveys of manufacturers suggest that a marked slowdown is underway, and jobless claims have risen recently.

The Fed is also still trying to gauge the fallout from recent bank turmoil, which could slow the economy by prodding lenders to be more cautious. A report from the Mortgage Bankers Association on Tuesday showed that the availability of home loans worsened in May for a third straight month.