Annual inflation falls to lowest rate since April 2021, as Americans pull back spending

Annual inflation fell in May to the slowest pace since April 2021, as Americans pulled back their spending, according to data released Friday by the Commerce Department.

The personal consumption expenditures (PCE) price index, which is the Federal Reserve’s preferred way to track inflation, rose 3.8 percent annually as of May — far lower than the 4.3 percent annual inflation rate clocked in April.

Prices rose just 0.1 percent between April and May, and 0.3 percent without counting food and energy, which often have more volatile prices. Inflation without food or energy, also known as “core” inflation, hit an annual rate of 4.6 percent in May, down 0.1 percentage points from April.

The plunge in annual inflation and the plateau in monthly price growth is the latest sign of optimism for the country’s battle with rapid price growth. Annual inflation has plunged from its peak of 7 percent in June 2022, according to the PCE price index, but is still roughly twice as fast as the Fed’s target of 2 percent.

The Fed boosted interest rates rapidly to bring inflation down, bringing its baseline interest rate up to a range of 5 percent to 5.25 percent in May before pausing last month. Higher interest rates are intended to slow the economy by giving households and businesses less money to spend, which could sap price-setting power from companies.

Consumer spending rose just 0.1 percent in May after rising 0.6 percent in April and was flat after adjusting for inflation. 

Inflation-adjusted consumer spending has nearly flatlined since February, a sign of households reaching their limits after years of high inflation and steady spending.