One of the most-watched inflation metrics showed a slight slowdown Wednesday, a sign that the price growth that has bedeviled the U.S. economy may be easing.
Consumer prices rose 3.3% on a 12-month basis in May compared to 3.4% in April, according to data released by the Bureau of Labor Statistics. That was also below expectations for an unchanged 3.4% reading.
The fine print of the report also provided economists with some reasons for optimism that inflation — the rate at which prices rise — is normalizing.
On a monthly basis, inflation was 0% — the lowest since July 2022. Excluding volatile food and energy prices, the monthly reading was 0.2% — the lowest since October.
Excluding more volatile food and gas items, the 12-month consumer price index (CPI) slowed to 3.4% — also an improvement from the 3.6% seen last month, ahead of expectations for 3.5%, and the smallest increase since April 2021.
Services prices excluding energy, which include medical, transportation and housing items, climbed just 0.2%.
While those figures represent an improvement from the nearly 10% inflation rate seen two years ago, the CPI has now been stuck at 3% to 4% for nearly a year.
In determining whether to start lowering interest rates, the Federal Reserve is likely to look favorably on Wednesday's reading. Still, it is expected to announce later in the day that, for now, rates will remain unchanged, remaining at the levels they've been for approximately a year.
”This was unequivocally a good report," said Olu Sonola, Fitch Rating’s head of U.S. economic research, in a note following the labor report's release. “The core services print of 0.2% was the lowest since September 2021 and that will definitely boost confidence if that trend continues over the next couple of months. While the door to an interest rate cut in July is effectively shut, the window still looks open for later on this year.”
Paul Krugman, a Nobel Prize-winning economist and New York Times columnist, declared, "Inflation has basically been defeated."
Others weren't ready to go that far. “May’s CPI represents a battle, but the war against inflation continues,” Bankrate Senior Economic Analyst Mark Hamrick said in a statement.
The Federal Reserve, which is tasked with trying to control inflation, has sought to slow the pace of price increases by raising interest rates. Today, credit card rates stand at more than 20%, according to Bankrate, while mortgages and many auto loan rates are above 7%.
By making it more expensive to borrow money for goods and services, the Fed hopes to slow demand and thereby reduce upward pressure on prices. When consumers can easily make purchases and investments, businesses are more inclined to raise prices.
Some economists have counseled patience. The Fed has kept its federal funds rate, which influences the other interest rates in the economy, at the same level — about 5.5% — since last summer.
Thanks to other external forces, especially the normalizing of supply chains following pandemic disruptions, the prices of many key consumer items have largely stopped climbing, and in some cases — as with airfare, vehicles and many electronics — are now declining.
Today, the bulk of ongoing price increases are in housing, which the BLS tracks in its shelter index. While those costs have declined on an annual basis each month since April 2023, they are still above 5%.
"Stuck is a good word," said Mark Franceski, managing director at Zelman & Associates, a housing market research and consultancy.
While some so-called spot measures of rents, from groups like CoreLogic and Zillow, are showing price declines in some cities, the BLS survey of shelter costs is designed to capture changes in the value of housing, Franceski said.
The survey has recently come under scrutiny, with critics saying it does not accurately reflect how consumers experience housing costs. For instance, it asks homeowners how much they think they could rent their house for if they decided to do so — an anecdotal data point rather than one rooted in day-to-day spending.
But Franceski said it still holds value. "They’re getting a decent read," he said of the BLS survey.
Election implications
Even if inflation data were to improve over the next several months, surveys suggest consumers are still catching up to a new, higher-cost environment.
Since the onset of the pandemic in spring 2020, the CPI has climbed a cumulative 22%. It's one reason why measures of consumer confidence remain below pre-pandemic levels.
Erik Lundh, senior global economist at The Conference Board economic insights group, estimates the amount of inflation that has accumulated since the pandemic is equivalent to the price increases that occurred over a 10-year period following the 2008-09 global financial crisis.
"It takes time for consumers to digest that amount of increase," he said. "When you stretch it over a decade, memories fade about what you were paying 10 years ago at the grocery store — but not three years ago. So the inflation we have seen is fresher in the mind, and that’s really weighed on them."
It may also help explain why at least one recent poll found 41% of registered voters better trust Donald Trump, who is running to regain the White House, to handle the economy, versus 37% who favor President Joe Biden — though that gap has narrowed in recent months.
In the meantime, multiple surveys have shown most Americans wrongly believe the U.S. economy is in a recession, despite continuing pay gains in many sectors and a still historically low unemployment rate of 4%.
"Consumers have been pretty consistently gloomy about the outlook over the next 12 months," Lundh said.
