A woman shops in a supermarket in Los Angeles, California, U.S. File
| Photo Credit: REUTERS

U.S. monthly inflation was unchanged in May as a modest increase in the cost of services was offset by the largest drop in goods prices in six months, drawing the Federal Reserve closer to start cutting interest rates later this year.

The report from the Commerce Department on Friday also showed consumer spending rose marginally last month.

It raised optimism the U.S. central bank could engineer a much-desired “soft landing” for the economy in which inflation falls without triggering a recession and a sharp rise in unemployment. Traders raised bets for a Fed rate cut in September.

‘Better behaved’

“It helps the argument inflation is looking better-behaved, which may well open the door to interest rate cuts later in the year,” said James Knightley, chief international economist, ING. The flat reading in the personal consumption expenditures (PCE) price index last month followed an unrevised 0.3% gain in April, the Commerce Department’s Bureau of Economic Analysis said.

Goods prices dropped 0.4%, the most since November. There were big declines in prices of recreational goods and vehicles as well as furnishings and durable household equipment. The price of gasoline and other energy goods dropped 3.4%. Clothing and footwear were also cheaper last month.

The cost of services rose 0.2%, lifted by higher prices for housing and utilities as well as healthcare.

The World Bank’s chief economist warned Wednesday that interest rate hikes could spell trouble for countries struggling to deal with debt.

The U.S. Federal Reserve, the European Central Banks and others have raised rates and warned that they could remain high longer than expected in order to bring down elevated inflation.

The International Monetary Fund said Tuesday that the world economy remains resilient despite the fallout from Covid, the war in Ukraine and a cost-of-living crisis, but that it was “limping along, not sprinting.”

“In spite of all of these shocks, we have not seen any big economies really get into trouble. But the good news basically ends there,” said World Bank chief economist Indermit Gill.

“The trouble now is that because of the high rates, the high interest rates that you mentioned, growth is slowing down a lot,” he said at a news conference during the IMF-World Bank annual meetings in Marrakesh, Morocco.

Mr. Gill recalled that during another long period of high interest rates, in the 1970s, around 24 economies were left bankrupt.

“We should expect this tightening cycle to also take long,” he said. “We should expect some countries to (get) into trouble.”

World Bank President Ajay Banga said there was “no doubt” that inflation has begun to come down but that rates will stay higher for longer.

“That can be a complicated event in many ways for investments as well as to people who over the years have got used to a low interest rate environment,” Mr. Banga said.