Inflation dropped to 3.3% in May
Inflation in the United States decreased slightly to 3.3% over the year ending in May, marking a modest reduction from previous figures and a positive development in the economic landscape as the Federal Reserve deliberates on the timing to start reducing interest rates. This update from the Bureau of Labor Statistics, reflecting on the consumer price index, boosts President Joe Biden’s administration, which has been highlighting positive economic data to improve public perception of its economic management. Although the inflation rate remains above the Fed’s target of 2% and monthly inflation was flat, the downward trend in ”core inflation”, which excludes unstable food and energy prices, shows that the Fed’s past rate hikes are starting to have an impact. High rates have been in place as part of the Fed’s strategy to control inflation, and the recent data reinforces the likelihood of upcoming rate cuts, although the timing is still uncertain. Economists point out that while the inflation data suggest potential for rate cuts, the Fed should remain cautious.
Notably, housing costs have continued to push the overall Consumer Price Index (CPI) higher with significant annual increases, even as energy and vehicle prices showed declines. Gasoline prices dropped significantly, yet energy prices are still up from last year. While grocery prices held steady from the previous month, they have seen a significant increase since Biden took office. This combination of trends illustrates the ongoing pressure on different sectors of the economy, affecting overall inflation and potentially influencing future monetary policy decisions.
Inflation fell a tenth of a percentage point to 3.3% for the year ending in May, a welcome development as the Federal Reserve considers when it will begin cutting interest rates.
The data reported on Wednesday by the Bureau of Labor Statistics in an update to the consumer price index are encouraging news for President Joe Biden. The White House has been emphasizing any positive inflation data alongside the country’s robust labor market as it aims to improve the public’s estimation of Biden’s management of the economy.
It is also positive for the Fed, which has worked to tamp down inflation for two years by raising interest rates. The decline further lends credence to the general consensus that the Fed will begin cutting rates sometime this year, although the exact timing is unclear.
Still, inflation has a long way to go before reaching the Fed’s 2% level.
On a month-to-month basis, inflation was flat.
“Core inflation,” which doesn’t include volatile food and energy prices, fell to two-tenths of a percentage point to 3.4% for the year ending in May. Overall, core inflation has generally trended down over the past 12 months, in evidence that the Fed’s tightening is starting to pay off.
“The Fed’s recession-level rate hikes are working, and as demand and inflation slow, it is time to reduce interest rates marginally,” said Chris Rupkey, chief economist at FWDBONDS. “The inflation data are sending the Federal Reserve a message, and it looks like they better keep a couple of interest rate cuts on the table this year because the market sure is.”
Housing costs pushed the CPI higher last month. Shelter costs rose 0.4% over the month and 5.4% over the year. Shelter prices contributed two-thirds of the annual increase in overall inflation.
The energy index fell 2% over the month, led by a 3.6% decrease in gasoline prices. Energy prices are now up more than 3.7% from this time last year.
Grocery prices were flat in May, but the price of food at home is up about 1% from a year ago. Still, compared to just a few years ago, when Biden was sworn into office, grocery prices have jolted by more than 20% — causing pain for families.
Car prices have also come down from peaks notched during the pandemic. New vehicle prices are down nearly 1% from a year ago, and used car prices have fallen 9.3% over the past 12 months.
Annual inflation peaked at about 9% in June 2022. Although it has since fallen, it is still running uncomfortably higher than the Fed’s 2% target.
Inflation has been blamed on various factors on both the supply and demand sides of the equation. Republicans have argued the explosion of stimulus spending during the pandemic and ultralow interest rates supercharged price growth. Democrats have been pointing to supply-side problems and noted that inflation increased in most Western countries, not just the United States.
Biden has become a major target of voters’ ire over the higher prices. Biden’s economic approval ratings are underwater, which is bad news for the president, given he is in a close election-year contest with former President Donald Trump, the expected Republican nominee.
Consumer sentiment has taken a hit as a result of the too-high inflation and the elevated interest rate environment.
In May, the University of Michigan Consumer Sentiment Index dropped to 69.1 — that marks a 10.5% drop in sentiment over the past month alone. The last time sentiment was this low was November 2023.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
Inflation and higher interest rates are overshadowing some positives in the economy. In many ways, the economy is not sputtering and has remained relatively robust. GDP growth, a broad measure of the country’s economic output and a key recession indicator, has been positive. The unemployment rate has remained at low levels, historically speaking.
The economy added 272,000 jobs in May, and the unemployment rate rose a tenth of a percentage point to 4%, the Bureau of Labor Statistics reported last Friday.
" Conservative News Daily does not always share or support the views and opinions expressed here; they are just those of the writer."
