Gasoline prices fell sharply in May, creating more room in consumers’ wallets. (iStock)
Inflation rose year-on-year in May but remained unchanged from the previous month as lower gasoline prices helped lower energy costs. Consumer Price Index The Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).
On an annualized basis, prices rose 3.3% in May, slowing slightly from the previous month’s 3.4% increase and below market expectations. On a monthly basis, prices were flat after rising 0.3% in the previous month. Economists surveyed by Dow Jones had expected a monthly increase of 0.1% and an annualized increase of 3.4%.
Core inflation, which excludes more volatile food and energy prices, rose 0.2%, down from a 0.3% increase in the previous month and the lowest level since April 2021.
“A monthly increase in the 0.1 to 0.2 percent range would be consistent with a 2 percent inflation rate,” said Daniel Hale, chief economist at Realtor.com. “The flat monthly data for May would help drive a significant improvement that would not only help lower the current annual inflation rate, but also help lower inflation rates over the coming months.”
The big drop in gasoline prices was the biggest factor in the decline in consumer prices. Fuel prices fell 3.6% in May, but the decline was offset by continued gains in home prices, which rose 0.4% for the fourth consecutive month, the BLS said. Food prices also rose 0.1% in May, with the eating out index increasing 0.4%.
“Finally, there were some nice surprises with both headline and core inflation coming in above expectations,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Food prices, one of the main pain points, rose slightly, but food prices at grocery stores remained flat. There was some relief at the gas pump, but unfortunately housing and apartment costs continue to rise and remain the main driver of inflation. We won’t see a meaningful decline in the CPI until housing costs start to make their much-needed comeback.”
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Will the Fed budge on interest rates?
The monthly progress is good, but more work may be needed to convince the Federal Reserve to cut interest rates this summer, according to Selma Hepp, chief economist at CoreLogic.
“The March report confirms that inflation remains a challenge for the U.S. economy,” Hepp said. “With the CPI still remaining somewhat elevated, it’s unlikely the Fed will cut interest rates in the near future. However, as the economy gradually slows, that should give the Fed the confidence to consider cutting interest rates at least once this year.”
Homebuyers who are currently holding off on purchases due to high borrowing costs would welcome a cut in interest rates. Since July, the Federal Reserve has maintained the range for the federal funds rate at 5.25% to 5.5%. Fed officials said they expect to cut interest rates in 2024 but need more confidence that inflation is moving toward their 2% target rate. According to a recent survey by BMO Financial, about 67% of Americans said owning a home is one of their most coveted goals, but 71% said they are waiting for an interest rate cut before entering the housing market. investigation.
“Given the rising costs of homeownership and widespread home affordability, lower interest rates will provide some relief to the housing cost burden for many prospective homebuyers,” Hepp continued.
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Home prices are a major obstacle to inflation
Housing inflation rose 0.4% from the previous month and 5.4% from a year earlier, slowing from April’s 5.5% increase. Housing figures are a drag on inflation and were the most significant contributor to the monthly increase in the index for all items excluding food and energy.
Hale said housing costs are down from last year, but the monthly change in the Housing CPI is higher than ideal because it’s still rising faster than overall prices. The housing index is likely to remain a big driver of overall and core inflation.
“If rents continue to fall in the future, Realtor.com May Rent Report“This suggests that house price inflation is likely to ease further in the coming months,” Hale said, “but the narrowing rent decline suggests that this trend could reverse and de-inflation could stagnate in the medium term.”
“If the Fed reaches its 2 percent target before inflation stalls, it can celebrate being done, but if inflation continues to exceed its target, it will complicate the Fed’s future policy calculations and make addressing the severe housing shortage even more important,” he continued.
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