Consumer prices in May registered their smallest increase in more than two years, sending a dovish signal to Federal Reserve officials as they contemplate pausing their campaign to bring inflation under control by raising interest rates.
The consumer price index rose by 4% on an annual basis and 0.1% on a monthly basis, the Bureau of Labor Statistics reported Tuesday, with both numbers lower than the month before, showing that inflation continues to decelerate overall.
Looking under the hood, though, the data are a bit more ambiguous. While the headline number has now fallen to about half its peak of 9.1% recorded in June 2022, core inflation – a measure that ignores volatile food and fuel prices – continues to run hot, registering 5.3% on an annual basis. The monthly core figure was 0.4%, which is the same as the monthly average for the measure so far this year, suggesting that core inflation may be stuck in a rut, and at a fairly high level.
Good news, with questions: The White House applauded the report. “Annual inflation is now at the lowest level since March 2021, and less than half of what it was last June,” President Joe Biden said in a statement. “After gas and grocery prices increased rapidly last year due to the war in Ukraine, inflation has fallen for 11 months in a row.”
Rep. Brendan Boyle, the senior Democrat on the House Budget Committee, also celebrated the latest report, while highlighting supply issues as the key source of the inflationary trend. “Today’s report is good news for our economy and for American families as the annualized inflation rate dropped by almost an entire percentage point,” he said in a statement. “As supply chains normalize and our economy transitions to steady and stable economic growth, inflation has continued to move in the right direction – declining for the eleventh month in a row.”
Peter Boockvar of the Bleakley Financial Group highlighted some of the ambiguous details that suggest the path back to the Fed’s inflation target of 2% may not be so easy. “The bigger question for inflation is: Where is it going? Where does it settle out?” he said, per The Washington Post. “Are we just going to go back to this 1-to-2 percent inflation trend that we got so used to? Or is there something so structural that after the spike, after the comedown, are we going to settle at 3 [percent]?”
Hawks vs. doves: The latest data provides ammunition for both inflation hawks, who want the Fed to press ahead in its effort to slow the economy by continuing to raise interest rates, and doves, who want the Fed to pause if not end its rate-hike campaign as inflation continues to ease. Fed officials will announce their next move on interest rates on Wednesday, at the conclusion of the June meeting of the Federal Open Market Committee.
Michael Strain, an economist at the conservative American Enterprise Institute, said the report shows that the Fed’s “job is clearly not done,” with both core inflation and the job market running too hot. “The Fed has to decide which mistake it is most comfortable making: hiking too far or not hiking far enough,” Strain wrote. “In my view, the former is the better mistake to make. Hike in June.”
Jason Furman, who chaired the Council of Economic Advisers under President Obama, said the inflation report is unlikely to change Fed officials’ minds when it comes to pausing its rate hikes at the June meeting – but it should. “The Fed has strongly telegraphed a pause/skip & nothing about this will change that,” Furman tweeted. “But is mildly unfortunate. Over the last 3 months core CPI is 5.0% annual rate. The employment mandate is fine with 283K jobs per month. Both much hotter than expected. Ought to raise now.”
Michael Pugliese, a senior economist with Wells Fargo in New York, told Reuters that he thinks inflation is clearly coming down, but the Fed will likely have to hold rates at their current relatively high level for some time. "We expect a more noticeable deceleration in core prices in the coming months," he told Reuters. "That said, directional progress should not be confused with mission accomplished. There is a lot of ground to cover in the inflation fight, which should keep the Fed from cutting rates until 2024”
And Jamie Cox, managing partner at Harris Financial Group, said in a note to clients that the latest data suggests the Fed is likely done with its rate hikes. “This CPI report is everything the Fed needs to pause — there is deflation and/or disinflation in every category,” he wrote, per Bloomberg. “If this trajectory holds in June, the need for further tightening is behind us.”
The bottom line: Inflation is declining, but it’s not clear how long it will take to return to pre-pandemic levels – or even if it will do so anytime soon.