Inflation fell a tenth of a percentage point to 3.3% for the year ending in May, a welcome development as the Federal Reserve considers when it will begin cutting interest rates.
The data reported on Wednesday by the Bureau of Labor Statistics in an update to the consumer price index are encouraging news for President Joe Biden. The White House has been emphasizing any positive inflation data alongside the country’s robust labor market as it aims to improve the public’s perception of Biden’s management of the economy.
It is also positive for the Fed, which has worked to tamp down inflation for two years by raising interest rates. The decline further lends credence to the general consensus that the Fed will begin cutting rates sometime this year, although the exact timing is unclear.
Still, inflation has a long way to go before reaching the Fed’s 2% level.
On a month-to-month basis, inflation was flat.
“Core inflation,” which doesn’t include volatile food and energy prices, fell two-tenths of a percentage point to 3.4% for the year ending in May. Overall, core inflation has generally trended down over the past 12 months, in evidence that the Fed’s tightening is starting to pay off.
“The Fed’s recession-level rate hikes are working, and as demand and inflation slow, it is time to reduce interest rates marginally,” said Chris Rupkey, chief economist at FWDBONDS. “The inflation data are sending the Federal Reserve a message, and it looks like they better keep a couple of interest rate cuts on the table this year because the market sure is.”
Housing costs pushed the CPI higher last month. Shelter costs rose 0.4% over the month and 5.4% over the year. Shelter prices contributed two-thirds of the annual increase in overall inflation.
The energy index fell 2% over the month, led by a 3.6% decrease in gasoline prices. Energy prices are now up more than 3.7% from this time last year.
Grocery prices were flat in May, but the price of food at home is up about 1% from a year ago. Still, compared to just a few years ago, when Biden was sworn into office, grocery prices have jolted by more than 20% — causing pain for consumers.
Car prices have also come down from peaks notched during the pandemic. New vehicle prices are down nearly 1% from a year ago, and used car prices have fallen 9.3% over the past 12 months.
Annual inflation peaked at about 9% in June 2022. Although it has since fallen, it is still running uncomfortably higher than the Fed’s 2% target.
Inflation has been blamed on various factors on both the supply and demand sides of the equation. Republicans have argued the explosion of stimulus spending during the pandemic and ultralow interest rates supercharged price growth. Democrats have been pointing to supply-side problems and noted that inflation increased in most Western countries, not just in the United States.
Biden has become a major target of voters’ ire over the higher prices. Biden’s economic approval ratings are underwater, which is bad news for the president, given he is in a close election-year contest with former President Donald Trump, the expected Republican nominee.
Consumer sentiment has taken a hit as a result of the too-high inflation and the elevated interest rate environment.
In May, the University of Michigan Consumer Sentiment Index dropped to 69.1 — that marks a 10.5% drop in sentiment over the past month alone. The last time sentiment was this low was November 2023.
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Inflation and higher interest rates are overshadowing some positives in the economy. In many ways, the economy is not sputtering and has remained relatively robust. GDP growth, a broad measure of the country’s economic output and a key recession indicator, has been positive. The unemployment rate has remained at low levels, historically speaking.
The economy added 272,000 jobs in May, and the unemployment rate rose a tenth of a percentage point to 4%, the Bureau of Labor Statistics reported last Friday.