Inflation cooled a bit to 2.6% for the year ending in May, as measured by the gauge favored by the Federal Reserve, declining about a tenth of a percentage point from the previous reading.

The slowdown in inflation in the personal consumption expenditures price index reported Friday morning by the Bureau of Economic Analysis was unexpected and is welcome news as the Fed works to quash inflation by keeping interest rates elevated. The consensus among economists was that PCE inflation would be running at 2.6%.

The Fed’s target is 2% inflation in the PCE index.

From April to May, inflation rose 0%, about in line with forecast expectations.

Core PCE inflation, a measure of inflation that strips out volatile energy and food prices, fell to a 2.6% year-over-year rate.

PCE inflation is charting lower than the consumer price index, which is the most closely watched inflation gauge. The most recent reading of the CPI showed that inflation fell slightly to 3.4% for the year ending in April. 

Also this week, consumer confidence in June, as charted by the Conference Board’s consumer confidence index, dropped as people expressed growing pessimism about the short-term prospects for the economy.

Higher interest rates, in addition to woes about inflation, are undoubtedly playing a role in souring consumer sentiment.

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The Fed has been closely watching inflation data and data on the overall economy to assess when it will finally start cutting interest rates. At the start of the year, most economists were expecting several rate cuts in 2024, but recent hotter-than-expected inflation reports have kept pushing back the timing of the first rate cut.

Now, the Fed is thinking there will be one rate cut or perhaps two this year. Investors are a bit more bullish and expect the first cut to come in September, with at least one more cut after that.