Inflation levels remain unchanged in May, brings 2 percent target into focus

Gas prices eased considerably in May, giving consumer wallets a break. (iStock)

Inflation was up year-over-year in May, but remained unchanged from the previous month as a dip in gas prices helped bring energy costs down, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).

On an annual basis, prices rose 3.3% in May, a slight softening from the 3.4% growth last month and below market expectations. On a monthly basis, prices remained unchanged after rising 0.3% the previous month. Economists surveyed by Dow Jones had been looking for a 0.1% monthly gain and a 3.4% annual rate. 

Core inflation, which excludes more volatile food and energy prices, increased 0.2%, below the 0.3% growth of the previous month and the lowest level since April 2021.  

"A monthly increase in the range of 0.1 to 0.2% is consistent with 2% inflation," Chief Economist Danielle Hale said. "The flat May monthly reading helped drive significant improvement that will contribute not just to lower annual inflation today, but also over the next several months."

The big dip in gas prices was the most significant contributor to falling consumer prices. Fuel prices dropped 3.6% in May, but the decline was offset by the continued increase in shelter prices, which was up 0.4% for the fourth consecutive month, the BLS said. Food prices also increased by 0.1% in May, with an increase of 0.4% in the food away-from-home index.

"Finally, some positive surprises as both headline and core inflation beat forecasts," said Robert Frick, Navy Federal Credit Union corporate economist. "One main pain point, food prices, did rise a bit but prices of food at grocery stores held steady. There was relief at the pump, but unfortunately, home and apartment costs continue to rise and remain the main cause of inflation. Until those shelter costs begin their long-awaited fall, we won't see major drops in CPI."

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Will the Fed budge on interest rates?

The monthly progress is positive, but more may be needed to persuade the Federal Reserve to cut interest rates this summer, according to CoreLogic Chief Economist Selma Hepp. 

"The March report confirms that inflation remains a sticky point in the nation's economy," Hepp said. "As the CPI remains somewhat inflated, it is unlikely the Fed will cut interest rates in the near term. However, as the economy gradually slows down, the Fed will get the confidence it seeks to consider a rate cut at least once this year."

Homebuyers currently sidelined by high borrowing costs would welcome a cut in interest rates. Since July, the Federal Reserve has maintained the federal funds rate range at 5.25% to 5.5%. Fed officials have said they anticipate rate cuts for 2024 but need more confidence that inflation is heading toward the 2% target rate. About 67% of Americans said owning a home was one of their most coveted goals, but 71% said they are waiting for rate cuts before entering the market, according to a recent BMO Financial survey

"Considering the surging cost of homeownership and widespread affordability challenges, a cut in interest rates would alleviate some of the housing cost burden for many aspiring homeowners," Hepp continued.

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Shelter prices major sticking point in inflation

Shelter inflation increased 0.4% on the month and was up 5.4% from a year ago, slower than the 5.5% increase in April. Housing-related numbers have been a sticking point in inflation and the most significant factor in the monthly increase in the index for all items, less food and energy. 

Shelter costs fell from last year, however, the monthly change in shelter CPI registered is higher than ideal because it is still growing faster than overall prices, according to Hale. The shelter index will likely remain a significant driver of overall and core inflation.

"Looking ahead, ongoing asking rent declines, as reported in the May Rental Report, suggest that additional easing in shelter inflation is likely in the next few months," Hale said. "But shrinking rent declines point to a potential reversal of this trend in the medium term that could cause disinflation to stall. 

"If inflation gets to the 2% target before this stall, the Fed can celebrate a job well done, but if inflation remains above target, it will complicate the Fed's policy calculus moving forward and will make addressing the substantial housing shortage that much more important," she continued.

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