Inflation in the United States fell slightly in May, with positive trends such as lower gasoline prices being offset by persistently high costs for housing. The consumer price index rose 3.3% in May from a year ago, down from 3.4% in April. This suggests that the fight against inflation is slowly bearing fruit, according to economists. While the current inflation rate remains above policymakers’ long-term target of around 2%, it has significantly decreased from its pandemic-era peak of 9.1% in 2022.
The Federal Reserve uses inflation data to guide its interest rate policy, with economists expecting the central bank to maintain borrowing costs at a roughly two-decade high. However, the latest inflation data supports the possibility of an interest rate cut in the coming months if the current trajectory remains unchanged. Lower gasoline and grocery prices have contributed to the recent decrease in the monthly inflation rate, which was unchanged at 0% in May compared to 0.3% in April and 0.4% in March.
In terms of inflation trends excluding volatile energy and food prices, the core CPI fell to a 0.2% monthly reading in May and 3.4% annually. However, housing remains a problematic category that has not decreased as quickly as hoped for, with shelter inflation at 5.4% annually in May. Despite this, economists expect housing inflation to continue to decline given prevailing real estate trends. Prices for household necessities like food, gas, and rent have remained relatively stable, which is viewed as encouraging.
Inflation for services, which has been slower moving compared to physical goods, is influenced by factors such as high wage growth and disruptions in the labor market. The goods side of the inflation story is said to be back to normal, while the services side has been more resistant to change. Categories with notable increases over the past year include motor vehicle insurance, medical care, recreation, and personal care. However, prices for physical goods excluding food and energy have seen a decline in the past year.
Overall, economists see positive signs in the fight against inflation, with trends suggesting that inflation may slowly be brought under control. While challenges remain, including persistently high housing costs and potential wage inflation, there are indications that inflation is on a downward trajectory. Monitoring monthly inflation data will provide a clearer picture of short-term movements and trends, helping policymakers make informed decisions regarding interest rates and the overall economy.
