Inflation softened in May, according to Wednesday’s Consumer Price Index (CPI) release from the Bureau of Labor Statistics (BLS). Headline CPI was flat on the month, below the expected growth of 0.1%, and lower than the 0.3% increase realized between March and April. On a year-over-year basis, the CPI increased 3.3%, coming in below estimates of 3.4%, and registering its lowest such increase since February of this year.
The CPI measures prices paid by urban households over time, using a basket of goods and services. It, along with core CPI (which excludes volatile food and energy prices), can be a useful measure for gauging the trajectory of inflation. With respect to core CPI, it rose 0.2% month-over-month (below the expected 0.3%) and 3.4% on the year (below the expected 3.5%). Notably, this was the lowest year-over-year reading in core inflation since April 2021.
Certain expenditure categories were more stubborn than others in terms of inflation. Shelter, which accounts for approximately one-third of the total index, rose 0.4% on the month. Used cars and trucks as well as food away from home also rose by 0.6% and 0.4%, respectively. Tobacco and smoking products and medical care commodities proved the stickiest of expenditures, rising 1.6% and 1.3%, respectively, versus April.
Some four-and-a-half hours after this inflation data release, the Federal Reserve announced it would not cut rates, revising its outlook to one cut in 2024 (a departure from the two rate cuts projected just last month). The Federal Open Market Committee members seem to be split on the direction of rates after this most recent meeting, with eight members supporting two cuts in 2024, seven supporting one, and four supporting none. Chairman Jerome Powell believes the current strategy is one of delaying rate cuts, with one cut being subtracted from 2024 and another being added to 2025, with the expectation for rates being unchanged by 2025 and 2026 year-ends.
One thing is for certain: the Fed has been adamant about their 2% inflation target. Even with the encouraging news this morning from the latest CPI release, both that measure and the Personal Consumption Expenditures (PCE) Index (which yields the Fed’s preferred measure of inflation largely on account of it being a more comprehensive gauge of prices than the CPI) remain above 2% on a year-over-year basis (CPI at 3.3% in May and the PCE index at 2.7% in April).
Although these inflation readings are higher than most would like, today’s CPI release was without a doubt positive news in the continued fight against inflation. Furthermore—just as the committee has shifted its rate-cut projection here in June—the Fed may alter its outlook to a more favorable bent if future CPI and PCE inflation releases continue to trend in the right direction.
