By John Ikani
The latest data released by the Bureau of Labor Statistics indicates a slowdown in U.S. inflation for the month of May. Both the consumer price index (CPI) and the core CPI, excluding food and energy, showed deceleration on an annual basis. Year-over-year inflation currently stands at 4%, the lowest level since March 2021. These figures support the argument for Federal Reserve officials to consider pausing their series of interest-rate hikes.
However, despite the overall slowdown, a crucial inflation indicator closely monitored by the Fed continued to rise at a concerning pace. The core CPI rose 0.4% for the third consecutive month, aligning with estimates. On the other hand, the overall CPI recorded a smaller increase of 0.1%, supported by lower gasoline prices.
These figures arrive just ahead of the Federal Reserve’s decision on whether to raise interest rates for the 11th consecutive meeting or to take a pause and assess the current economic conditions. While several policymakers, including Chair Jerome Powell, have indicated a preference for skipping a rate hike at the upcoming meeting, they still remain open to future tightening if necessary.
Economists generally agree that the central bank will leave rates unchanged during this week’s meeting. However, the next CPI report, expected in July, will play a pivotal role in determining the Fed’s course of action at the subsequent meeting.
Omair Sharif, president of Inflation Insights LLC, expressed optimism regarding the current scenario, stating, “This is a pretty good print in terms of signalling that we are likely to see the core CPI soften materially starting next month. The way things are going now, I suspect we’ll see a soft core that will tamp down the odds of a July hike.”
Following the release of the report, treasury yields fell as traders adjusted their expectations for a rate hike this week, while S&P 500 futures experienced an increase.
A closer look at the details reveals that the monthly advance was contributed to by shelter costs, used cars, and motor vehicle insurance, whereas airfares and household furnishings saw a decline.
When excluding housing and energy, service prices rose by 0.2% compared to the previous month, according to Bloomberg calculations. This level is more consistent with pre-pandemic trends. On a yearly basis, the metric increased by 4.6%, marking a decline since its peak late last year.
While Federal Reserve Chair Jerome Powell and his colleagues emphasize the importance of considering such metrics when assessing the nation’s inflation trajectory, they compute it based on a separate index.
These two gauges can significantly diverge, as seen in April when the CPI-based figure reached a nine-month low, while the other, based on the personal consumption expenditures price index, accelerated. The May PCE price index is set to be released later this month.
Within the overall CPI index, shelter costs, which constitute the largest services component and account for approximately a third of the index, reaccelerated to 0.6%. This increase was bolstered by rising hotel stay costs and persistently high rents.
On the other hand, the gasoline price index fell by 5.6%. After two consecutive months of decline, grocery prices saw a slight increase, while dining out became more expensive.
While much of the CPI’s retreat from its 40-year high in June 2022 can be attributed to disinflation or even deflation in merchandise categories, driven by the normalization of supply chains and a shift in consumer preferences towards services, this trend has somewhat reversed in recent months. Core goods prices, which exclude food and energy commodities, rose by 0.6% for the second month in a row.
The Federal Reserve’s ability to stimulate the economy without triggering a recession remains uncertain, particularly given the mixed reports from current data. Wage gains also vary depending on the metric. According to a separate report released on Tuesday, real average hourly earnings increased by 0.3% in May, marking the strongest growth this year.
Comparing the figures to a year ago, they rose by 0.2%, the first positive reading in over two years. Fed officials are reevaluating their perspective that wage gains are fueling inflation, which could further strengthen the case for a pause in interest-rate hikes this week.
The outlook for interest rates remains unclear, but the availability of new data should assist Fed officials in making their decision. Between now and the central bank’s July meeting, policymakers will have access to fresh figures on consumer spending, employment, PCE inflation, and another CPI report, which will help shape their future actions.
