Consumer prices cooled in May and are now 50% lower than last year’s peak inflation reading.
The consumer price index (CPI), which measures the price fluctuations of a broad basket of goods and services in the U.S., rose 0.1% in May on a seasonally adjusted basis after increasing 0.4% in April, the U.S. Bureau of Labor Statistics (BLS) reported Tuesday.
Over the last 12 months, inflation rose 4%, beating out consensus estimates of 4.1% for May. Inflation in the month prior was 4.9% year-over-year, meaning May’s 4% headline reading is now the lowest level seen since March 2021 and more than half of June 2022’s peak 9.1% reading.
Despite inflation remaining stubbornly high and double the Federal Reserve’s 2% target, easing consumer prices in May could be an encouraging sign the Fed will consider pausing rates.
“The encouraging trend in consumer prices will provide the Fed some leeway to keep rates unchanged this month and if the trend continues, the Fed will not likely hike for the rest of the year,” said Jeffrey Roach, chief economist at LPL Financial, CNBC reported.
While a pause is certainly on the table after Tuesday’s CPI report, the economy is not out of the woods just yet, according to Kathy Bostjancic, chief economist at Nationwide in New York.
“The moderate slowing provides the Fed room to pause its rate hikes this week. However, if economic data continues to surprise to the upside and inflation remains sticky, the door is open for another rate hike in the coming months, as soon as July,” she said, per reporting from Reuters.
This sentiment is also shared by PNC Senior Economist Kurt Rankin, who told The Dallas Express in an email that “A reversal in monetary policy from the Fed will require much more progress toward the 2.0% target on Core inflation.”
Federal Reserve members will assess Tuesday’s CPI at their two-day Federal Open Market Committee (FOMC) meeting on June 13-14 to determine whether to pause interest rates for the first time in 15 months and 10 consecutive increases.
Fed futures currently forecast a 93% chance of a rate pause at Wednesday’s FOMC meeting, with only a 7% chance that the Federal Reserve will approve a further 25 basis point increase, according to data presented in the CME FedWatch Tool on Tuesday around 1 p.m.
The most significant contributors to inflation in May were increases in the price of housing (+0.6%), used cars and trucks (+4.4%), and food (+0.2%), the Labor Department said. Other components that increased during the month were the index for motor vehicle insurance (+2.0%), apparel (+0.3%), and personal care products (+1.0%).
The indices for airline fares (-3.0%) and for household furnishings and operations (-0.6%) were among those that decreased over the month.
While some indexes have benefited from monthly price decreases, the year-over-year increase on many indexes is still above the current 4% annual inflation reading. For instance, the energy index’s 8.3% year-over-year increase is currently double inflation’s 4% annual rate, data in the report show.
Other indexes with yearly increases exceeding inflation include food (+6.7%), electricity (+5.9%), shelter (+8.0%), transportation services (+10.2%), new vehicles (+4.7%), and medical care (+4.4%), among others.
Indexes that have seen year-over-year decreases, coming in below the inflation rate, include gasoline (-19.7%) and utilities (-11%).
Core CPI, which excludes the volatile food and energy component, was in line with consensus expectations, rising 0.4% percent in May, following identical increases in both April and March, the Labor Department said in the report. While core inflation had hovered around 5.4%, it finally dropped to an annual rate of 5.3% in May, reaching a level not seen since November 2021.
Michael Pugliese, a senior economist with Wells Fargo in New York, expects a more noticeable deceleration in core prices in the coming months.
However, Pugliese suggested that “directional progress should not be confused with mission accomplished.”
“There is a lot of ground to cover in the inflation fight, which should keep the Fed from cutting rates until 2024,” he said, per Reuters.
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