In May, US consumer prices saw a mild increase of just 0.1% compared to the previous month, indicating a steady alleviation of stubborn inflation over the past year. However, underlying price pressures continue to persist in the market. The annual inflation rate dropped to 4% in May, the lowest it has been in over two years and significantly below April's 4.9% rise. This reduction was primarily due to declining gasoline prices, smaller price increases for groceries, and lower costs for items such as home furnishings, air fares, and home appliances.
Despite these changes, the Federal Reserve is expected to maintain current interest rates at its upcoming two-day meeting. There may, however, be hints of future rate hikes later this summer, as officials evaluate the impact that the prior ten rate increases may have had on inflation and the broader economy.
The relatively small dip in inflation from last month is unlikely to suggest to the Fed that stubbornly high inflation, which has plagued the nation for two years, is now under control. The focus instead is on core prices, which exclude unstable food and energy costs and provide a clearer picture of inflation. In May, core prices increased 0.4% from the previous month, marking the sixth consecutive month of increases at this level or higher. Despite dropping slightly from 5.5% to 5.3% compared to the previous year, core inflation remains far above the Fed's 2% target.
Very high rental costs and a second consecutive spike in used car prices primarily drove last month's core inflation rate. Wholesale used car prices, however, declined, potentially indicating future reductions in retail used car prices. Adjusted for seasonal variations, gas prices fell 5.6% from April to May and are nearly 20% lower than a year ago.
The resilience of the underlying inflation highlights a major challenge for the Fed as the economy continues to resist recession forecasts. With robust employment, rising average wages, and free-spending workers, there are fears that high inflation may persist. Some economists believe that many businesses are maintaining high prices to boost profits, implying consumers may need to cut spending back before businesses show a willingness to lower prices.
Over the past 15 months, the Fed has raised its benchmark rate by 5%, leading to increased costs for borrowing including home mortgages, credit cards, auto loans, and business loans. The goal is to slow borrowing and spending, cool the economy, and manage inflation without triggering a deep economic recession.
Inflation is predicted to continue its downward trend, potentially dropping as low as 3.2% in the figures from June, which would be a significant decrease from last year's peak of 9.1%. Nevertheless, any steep declines in May and June reflect the high prices during these months the previous year, which, when replaced with smaller monthly gains in year-over-year calculations, can sharply reduce annual inflation metrics. Despite this, core prices are expected to remain high in May due to another surge in used car prices and steady rises in rental costs and real estate values.
