WASHINGTON (AP) – Consumer prices in the United States cooled off last month, rising just 0.1 percent from April to May and a steady decline from last year’s inflation. At the same time, some measures of underlying price pressures remained elevated.
Measured year-on-year, inflation slowed to just 4 percent in May – the lowest 12-month figure in two years and well below April’s 4.9 percent annual increase. The pullback was driven by declining gas prices, much smaller increases in grocery prices than in previous months, and less expensive furniture, airfares and appliances.
Tuesday’s inflation data comes just as Federal Reserve officials begin a two-day meeting, after which they are expected to make 10 straight rate hikes through March 2022, leaving interest rates alone. The central bank will announce this on Wednesday. It is skipping a rate hike but could indicate it will start raising rates as soon as July. Top Fed officials have said they are leaning toward a so-called “skip” to assess how their rate hikes have affected inflation and the overall economy.
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Still, last month’s decline in overall inflation is unlikely to convince Fed policymakers that they are any closer to curbing the high inflation that has gripped the country for two years. The Fed focuses more on “core” prices, which exclude volatile food and energy costs and generally provide a clearer view of inflation.
And core prices remained high last month, rising 0.4 percent from April to May, the sixth straight month of growth at that level or higher. Core inflation came down to 5.3 per cent from 5.5 per cent a year ago. That’s still well above the Fed’s target of 2 percent.
Last month’s core inflation was mainly fueled by higher apartment rental costs and a second straight jump in used car prices, which rose 4.4 percent from April to May. On the other hand, the wholesale prices of used cars declined last month, which may predict a reduction in the retail prices of used cars in the coming months.
Gas prices, adjusted for seasonal patterns, fell 5.6 percent from April to May; They’re down about 20 percent from a year ago. And grocery prices rose just 0.1 percent, a relief to consumers, though they’re still 5.8 percent higher than a year ago.
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The persistence of underlying inflation reflects a fundamental challenge for the Fed: The economy has consistently defied long-standing forecasts for a recession, more than a year in advance. Instead, businesses have been hiring at a healthy pace, average salaries are rising and workers are freely spending their larger salaries.
While a flexible economy is great for households and businesses, it can also help fuel chronically high inflation. Some economists argue that many companies are keeping prices artificially high, more than necessary to cover their higher costs in order to drive profit growth. The country’s consumers may have to retreat en masse before most businesses reduce prices. Meanwhile, continued strong hiring is allowing Americans to spend overall.
The Fed has raised its benchmark rate by a whopping 5 percentage points over the past 15 months – the fastest rate hike in four decades. Those increases have led to higher costs for mortgages, auto loans, credit cards and business lending. The Fed’s goal is to slow borrowing and spending, cool the economy and reduce inflation — without leading to a deep recession. This is a very difficult task.
There are some signs that the Fed’s efforts are having the desired effect. Another big move on inflation is expected in the June data to be reported next month. According to estimates by some economists, the price rise may be lower at 3.2 per cent compared to a year ago. This would be well below the high of 9.1 per cent inflation in June 2022, the highest level in four decades.
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Yet any sharp decline in May and June would reflect the fact that prices had risen in both those months last year. As those months fall out of the year-over-year inflation calculation, they are replaced by a smaller monthly benefit. The effect could sharply reduce measures of annual inflation.
Nevertheless, core prices are expected to remain high in May due to another jump in used car prices and a continuing increase in rental costs. Used car prices just rose 4.4 percent from March to April. Economists expect another increase from April to May, although not as large.