Inflation is receding after spiking in the first quarter as 525 basis points worth of rate hikes from the Fed since 2022 cool domestic demand. Inflation, however, continues to run above the central bank's 2% target.

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 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. In the 12 months through May, the PCE price index rose 2.6%, which compares with 2.7% in April.

Economists surveyed had expected the PCE price index to remain unchanged for the month and increase 2.6% year-on-year.

Inflation is receding after spiking in the first quarter as 525 basis points worth of rate hikes from the Fed since 2022 cool domestic demand. Inflation, however, continues to run above the central bank's 2% target.

Excluding the volatile food and energy components, the PCE price index rose 0.1% last month, and April data was revised higher to 0.3% from 0.2%.

Core inflation increased 2.6% year-on-year in May, the smallest advance since March 2021, after rising 2.8% in April.

The Fed tracks PCE price measures to guide its monetary policy. Monthly increases of 0.2% are required for inflation to return to target.

The Fed has kept its benchmark overnight rate in the current range of 5.25%-5.50% since July last year. While monetary policymakers have recently adopted a more restrictive stance, financial markets expect the Federal Reserve to begin its easing cycle in September.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2% last month, following 0.1% in April, the report said.

Inflation fatigue, rising borrowing costs, moderating wage increases and declining savings are holding back spending.