Annual inflation slowed to a 4% rate in May, the Bureau of Labor Statistics reported Tuesday, down from 4.9% the month before.
The sharp drop in headline inflation is a positive development as the Federal Reserve convenes to decide monetary policy Tuesday after aggressively raising interest rate hikes over the past year in a desperate bid to limit the price hikes. Tuesday’s report marks 11 straight months of declines in annual inflation after the rate peaked at a whopping 9.1% in June.
The large decline in the annual inflation rate was driven by the massive jump in May 2022 falling out of the equation. Prices rose nearly 1% just in that month, thanks in large part to soaring energy costs and supply-chain disruptions caused by Russia's invasion of Ukraine.
Still, details from Tuesday's report shed light on the latest trends in price movements. "Core inflation,” which strips out volatile food and energy prices, rose to 5.3% in the year ending in May.
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This week the Fed convened a two-day meeting to discuss its monetary policy. The Fed is set to make a highly-anticipated announcement on Wednesday about whether it will again raise its interest rate target.
Prior to Tuesday’s latest CPI report, most investors expected that the Fed will pause its rate hiking to assess whether it has sufficiently tightened.
As of Monday, investors assigned about an 75% chance that the Fed will pause rate hiking, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. Just one in four thought the Fed will hike again.
The Fed’s current target range is between 5% and 5.25%.
Soaring inflation has battered households over the past two years and upended some support for President Joe Biden and his economic agenda. Republicans have used the rising prices as a cudgel to attack the administration and have blamed big spending bills, like Biden’s pandemic relief legislative package, as major drivers of inflation.
The Fed’s next move with its interest rate target is being closely scrutinized as it comes against the backdrop of several other big and ongoing economic stories, such as banking sector turmoil, a weakened housing market, and fears of broad-based recession.
The county’s banking sector is still being closely watched following the sudden failure of Silicon Valley Bank back in March. SVB’s downfall acted as a bit of a domino and led to a few other bank collapses as well as some regional banks seeing their stock values plunge.
The federal government was able to step in and stymie the worst of the fallout, but economists are still keeping an eye the banking system given the overall volatility of the economy amid the Fed’s rate hiking.
While the economy as a whole is not in a recession, many economists argue that the housing market is in a recession. Home prices are falling, a sign of just home much the market has cooled since its peak in 2020 when the Fed slashed rates to near-zero and mortgage rates fell in response, causing demand to explode.
As of Monday, the average rate on a 30-year, fixed-rate mortgage was 6.71%, according to Freddie Mac. That number is up from a recent low of just under 6.1% registered in late January and early February. The rate on an average 15-year, fixed-rate mortgage was 6.07%.
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In a bright spot for the economy, there have been several months of strong job gains. Recent employment reports have proven surprisingly resilient, with the unemployment rate hovering around multi-decade lows.
The economy blew past expectations in May and added another 339,000 jobs, showing labor market fortitude despite the rate hikes.