Consumer prices rise slightly

Consumer prices in the United States saw minimal growth in May, with the annual inflation rate being the lowest in over two years. Despite this, underlying price pressures remained robust, reinforcing expectations that the Federal Reserve would maintain its current interest rates while adopting a more hawkish stance. The US Department of Labor’s report, released on Tuesday, indicated that the lower-than-anticipated increase in the consumer price index (CPI) was largely due to declines in energy costs and services, including petrol and electricity. However, rents remained steady, and the prices of used cars and trucks continued to rise.

Seema Shah, Chief Global Strategist at Principal Asset Management, noted that it would have required a significant inflation surprise for the Fed to consider hiking interest rates in June. However, given the further increase in annual core inflation in May and the strong jobs report, the possibility of a Fed rate hike in July remains on the table. In May, the CPI only rose by 0.1 percent, primarily due to lower petrol prices, compared to a 0.4 percent increase in April. Over the twelve months leading up to May, the CPI recorded a 4 percent climb, representing the smallest year-on-year increase since March 2021, following a 4.9 percent rise in April.

The annual CPI reached its peak at 9.1 percent in June 2022, the largest surge since November 1981, and has since been receding as the significant increases from last year no longer factor into the calculation. Economists surveyed by Reuters had predicted a 0.2 percent increase in the CPI for May and a 4.1 percent rise on a year-on-year basis. Recent data has provided a mixed view of the labor market, with nonfarm payrolls showing solid growth in May but the unemployment rate increasing to a seven-month high of 3.7 percent, up from a 53-year low of 3.4 percent in April.

With signs of an economic slowdown emerging, economists argue that the Fed should pause further rate hikes to evaluate the impact of the measures taken to cool down demand. Overall inflation is decelerating, largely due to energy and food costs stabilizing. Food commodity prices have returned to pre-Russia invasion levels of February 2022. However, inflation excluding these volatile categories remains persistent and remains well above the Fed’s target of 2 percent. The core CPI, which excludes food and energy, increased by 0.4 percent in May, marking the third consecutive month of such growth.

The core CPI’s upward pressure was primarily driven by high rents and the continued rise in used car and truck prices. The delayed impact of price increases during the winter and early spring contributed to the surge in used vehicle prices. However, it is expected that core inflation will gradually slow down beyond May, driven by a moderation in rents and a resumption of price declines for used cars and trucks. The rental vacancy rate reached a two-year high in the first quarter, and independent measures indicate a downward trend in rents. Rental measures in the CPI typically lag behind independent gauges by several months. In the twelve months leading up to May, the core CPI increased by 5.3 percent, slightly down from the 5.5 percent rise in April.