A 2-Year Low: May Inflation Rate Cools to 4%

The annual inflation rate in the US fell to its lowest in over two years in May, alleviating some of the pressure on the Federal Reserve to persist in hiking interest rates. This information comes from a report released by the Labor Department on Tuesday.

The consumer price index (CPI), an indicator that gauges shifts in the prices of a wide array of goods and services, saw a minor increase of just 0.1% for May. This brought the yearly rate down to 4%, the smallest 12-month hike since March 2021, when inflation was just on the brink of surging to its highest level in 41 years.

However, the outlook is less promising when volatile food and energy prices are left out of the equation. Core inflation, which excludes these items, grew by 0.4% for the month and was still 5.3% higher compared to the same time last year. This suggests that while the pressure on prices has somewhat abated, consumers continue to feel the pinch.

These figures are precisely in line with the predictions made by Dow Jones.

A decrease of 3.6% in energy prices was instrumental in maintaining the modest CPI growth for May. Meanwhile, food prices saw a marginal rise of 0.2%.

On the other hand, a 0.6% surge in shelter costs was the most substantial factor driving the rise in the all-items, or headline, CPI reading. Housing-related expenses constitute approximately a third of the index’s weighting.

Furthermore, the cost of used vehicles rose by 4.4%, mirroring the increase seen in April, while transportation services saw an uptick of 0.8%.

Interestingly, market responses to the report were muted, despite its anticipated significance to the Federal Reserve's decision-making process in this week's meeting concerning interest rates. Futures in the stock market were slightly positive, even as Treasury yields plummeted.

However, there was a noticeable shift in pricing in the Fed funds market, with traders now accounting for a 93% probability that the Fed will not hike benchmark rates when the meeting concludes on Wednesday.

The positive trajectory in consumer prices is likely to afford the Federal Reserve some flexibility to maintain the current rates this month, suggested Jeffrey Roach, Chief Economist at LPL Financial. He added that if this trend holds steady, there may be no necessity for the Fed to implement rate hikes for the remainder of the year.

The subdued CPI reading spells good news for the workforce. According to a separate release from the Bureau of Labor Statistics, average hourly earnings, adjusted for inflation, rose 0.3% for the month. Year-on-year, real earnings have grown by 0.2%, marking a recovery after remaining in the negative for much of the inflation spike that began roughly two years ago.

The consumer price index report highlights a widening gap between core and headline numbers. The all-items index typically outpaces the ex-food and energy measure, but this trend has reversed of late.

This year-on-year discrepancy between the two measures can be attributed to the surge in gas prices around this time in 2022. In an unprecedented move, prices at the pump exceeded $5 a gallon in the US. Tuesday’s BLS report demonstrated that gasoline prices have dropped 19.7% over the past year.

However, food prices remain 6.7% higher than a year ago, even as egg prices plummeted 13.8% in May and are now slightly negative on a 12-month basis, following a spike in previous months. Shelter prices have gone up by 8% and transportation services by 10.2%. Simultaneously, airline fares have been decreasing, falling 13.4% year on year.

Today in precious metals, gold prices fell 0.58% to $1,945.73 per ounce. Silver dipped 1.11% to $23.77 per ounce. Platinum decreased by 1.21% to $997.50 per ounce, while Palladium rose by 1.49% to $1,366.00 per ounce. Bitcoin sunk 0.32% to $25,827.00.

What potential impacts could the Federal Reserve's decision on maintaining or changing interest rates have on the economy for the remainder of the year?