Inflation Grew At 4% Rate In May, Its Slowest Pace In 2 Years

Inflation in May cooled to its slowest pace in two years, indicating price increases are easing amid the Federal Reserve's rate-hiking regime. 

The Consumer Price Index grew at an annual rate of 4%, the Labor Department said on Tuesday — the smallest increase since March 2021 and below the 4.2% annual increase economists had expected.

Core inflation, which strips out volatile food and energy prices, rose 5.3%, dipping from its annual rate of 5.6% so far this year. Economists have focused more on "core" inflation as it presents a truer gauge of price increases, and the current rate is still far above the Fed's 2% target.

Falling energy prices counterbalanced rising costs for shelter, used cars, restaurant food and groceries restaurants. Gasoline prices have fallen nearly 20% over the past year, while overall energy costs are down 11%.

"Overall inflation is declining, driven by year-over-year relief through the energy and commodities channel," Joe Brusuelas, chief economist at RSM, said in a blog post.

"[G]etting inflation from 9.1% to 4% will be easier than driving it down from 4% to 3%," he said, adding "it is important to note that the direction and pipeline pressure inside the service sector are all moving in the right direction."

Still, the report contained some worrying figures, as the fastest-growing prices were in essential categories.

"Headline inflation dropped while core inflation continued to grind down, but this report contains plenty of pain, especially for lower-income Americans," Robert Frick, chief economist at the Navy Federal Credit Union, said in a note.

He added, "Higher food and shelter prices pushed up the costs of the top two necessities that take outsized chunks from those with lower incomes. And higher used vehicle prices, combined with high vehicle insurance and repair costs, make transportation an increasingly heavy burden."

Fed's next move

Shares rose in early trading on Tuesday, reflecting Wall Street's optimism that the Federal Reserve could hold off on hiking interest rates this week.

The Federal Reserve's rate-setting committee begins a two-day meeting on Tuesday. The central bank has raised interest rates sharply since March 2022, with 10 straight rate hikes that have raised the cost of mortgages, credit-card debt and car loans, subdued fast-growing tech companies and destabilized banks unprepared for rising rates.

The committee is widely expected to hold interest rates steady when it announces its decision Wednesday. Top Fed officials have recently called for a pause to give the central bank time to assess how its hikes have affected inflation and the overall economy.

The Associated Press contributed reporting.

First published on June 13, 2023 / 8:41 AM

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