Annual inflation rose 0.3 percentage points to a 2.3 percent rate in May, the Bureau of Economic Analysis reported Friday, the fastest such pace since March 2012.
With May’s results, it appears that inflation is solidifying near the Federal Reserve’s 2 percent target, after running below target for most of the past six years.
Core inflation, a measure of price gains that strips out the volatile components of food and energy, hit 2 percent exactly in May, the first time since April of 2012 it hit that mark.
Friday’s price numbers are based on the personal consumption expenditures index, the inflation gauge favored by the Federal Reserve.
From the Fed’s perspective, inflation hitting the target is a sign that its monetary policy appropriate.
Yet there are no guarantees that inflation will stay right at 2 percent. It could change quickly, as it did at the start of last year, especially if the Fed moves rapidly to raise rates.
While the Fed thinks it is near its inflation goal, it is “not ready to declare victory until we sustain that over time, which we haven’t done yet,” Chairman Jerome Powell said this month.
Despite Friday’s numbers, the Fed “cannot rest easy,” commented Gus Faucher, chief economist for PNC. Faucher predicted that the Fed would continue to raise its interest rate target only slowly, with one more rate hike of a quarter percent this year.
The Fed favors 2 percent inflation not for its own sake, but as a sign that it is not keeping money too loose or too tight. If inflation falls below target for a long period of time, the Fed takes that as a sign that monetary policy is too tight and weighing against job creation and economic growth.
