Advertisement
UK markets closed
  • FTSE 100

    8,155.72
    -49.17 (-0.60%)
     
  • FTSE 250

    21,067.68
    -166.48 (-0.78%)
     
  • AIM

    784.13
    -3.54 (-0.45%)
     
  • GBP/EUR

    1.1866
    -0.0009 (-0.08%)
     
  • GBP/USD

    1.2915
    -0.0032 (-0.25%)
     
  • Bitcoin GBP

    52,139.25
    +520.82 (+1.01%)
     
  • CMC Crypto 200

    1,385.23
    +54.34 (+4.08%)
     
  • S&P 500

    5,505.00
    -39.59 (-0.71%)
     
  • DOW

    40,287.53
    -377.49 (-0.93%)
     
  • CRUDE OIL

    80.25
    -2.57 (-3.10%)
     
  • GOLD FUTURES

    2,402.80
    -53.60 (-2.18%)
     
  • NIKKEI 225

    40,063.79
    -62.56 (-0.16%)
     
  • HANG SENG

    17,417.68
    -360.73 (-2.03%)
     
  • DAX

    18,171.93
    -182.83 (-1.00%)
     
  • CAC 40

    7,534.52
    -52.03 (-0.69%)
     

Inflation slowed in May, hinting at welcome relief for consumers

David Paul Morris/Bloomberg/Getty Images

Inflation cooled more than expected in May, new data showed Wednesday, delivering a welcome piece of news just hours before the Federal Reserve is set to make its latest announcement on interest rates.

Consumer prices rose 3.3% from a year earlier, slowing from April’s 3.4% rate, according to the Bureau of Labor Statistics’ latest Consumer Price Index report released Wednesday.

On a monthly basis, prices held flat for the first time since July 2022. Falling gas prices kept inflation in check following a 0.3% gain in April.

“This is the best news we could’ve gotten this morning,” Philip T. Powell, executive director of the Indiana Business Research Center and clinical associate professor at the Indiana University Kelley School of Business, told CNN. “The Federal Reserve has been watching to make sure this [monthly] number came in below 0.2%.”

ADVERTISEMENT

“If it did, that means inflation is going to come down, which means [the Fed] could lower interest rates,” he added.

Economists were expecting a 0.1% monthly increase and an annual gain of 3.4%, according to FactSet consensus estimates.

Helping to slow inflation in May were falling gas prices, which dropped 3.6% from April. They’re still up 2.2% for the year. Grocery prices were flat and overall food prices went up by 0.1%, lifted by a slight acceleration in inflation at the restaurant level.

Car insurance and transportation prices fall, but housing inflation is stuck running high

Excluding gas and food, categories that tend to be volatile, the closely watched “core” measure rose just 0.2% for the month (its slowest pace since October of last year), and its annual rate dropped to 3.4%, setting a fresh three-year low.

“Adding to the good inflation news, core services inflation (excludes energy services) printed its mildest monthly increase since September 2021,” Kathy Bostjancic, Nationwide’s chief economist, wrote in a note issued Wednesday. “This is significant since core services inflation has been very sticky and the key reason overall inflation has not cooled more quickly.”

However, shelter inflation more than offset the decline in gasoline, rising 0.4% for the fourth month in a row, underscoring the pressure Americans are feeling from housing-related expenses. On an annual basis, shelter inflation slowed a tenth of a percentage point to 5.4%, which is its lowest rate since April 2022. However, in addition to outpacing overall inflation, the cost of shelter is running above its pre-pandemic average and the 3.3% rate in February 2020.

The shelter index, an abstruse measurement of housing costs, has been the thorn in the side of the Fed’s desire to see overall inflation return to target. (That target, by the way, is based on a separate inflation gauge, the Personal Consumption Expenditures price index, which stayed pat at 2.7% in April.)

Shelter’s heavily weighted in the CPI, and while it doesn’t fully reflect some of the slowdown seen in market-rate rents, its persistently high readings certainly do speak to the pain Americans are feeling in their biggest monthly expense.

“The one thing that sticks out in these numbers is the continued struggle with housing affordability,” Indiana University’s Powell said. “There is so much pent-up demand out there for housing, it’s not going to go away.”

Transportation services prices fell for the first time since the fall of 2021, dropping 0.5% for the month. And motor vehicle insurance prices ticked down by 0.1%, a sharp contrast from the spikes seen during the past two months.

Still, those costs continue to run hot for consumers, with transportation services prices up 10.5% from a year ago and car insurance up 20.3%.

“The big and important things that households spend their money on — food, transportation and shelter — there’s not been a lot of relief there,” Sean Snaith, University of Central Florida economist, told CNN.

Soft CPI boosts chances for Fed cuts

The CPI, which tracks average change in prices for a basket of goods and services common to consumers, is the most widely cited inflation metric.

But on Wednesday, it was merely the opening act.

The report landed just hours before the Fed was scheduled to wrap up its policymaking meeting, deliver its latest economic projections, and announce the next steps for interest rates.

Although the softer CPI likely will be welcomed by central bankers, economists say it won’t be enough to move the needle on interest rates, which are overwhelmingly expected to hold steady Wednesday (markets are seeing a mere 0.1% probability of a June cut).

“Logically, then, today’s news would seem to open the door to a July rate cut, although we still think that’s very unlikely given hawkish rhetoric from the Fed recently,” Preston Caldwell, chief US economist at Morningstar, wrote Wednesday. “But rate cuts starting by September should now be cemented as overwhelmingly likely.”

Traders seem to agree: The latest projections from the CME FedWatch Tool had the likelihood of a September rate cut at nearly 63% on Wednesday morning, jumping from 46.8% Tuesday.

The Fed on Wednesday is expected to tip its hand some with the release of the latest Summary of Economic Projections (SEP). The quarterly publication includes the central bankers’ forecasts for key economic indicators such as inflation, GDP growth and unemployment as well as the “dot plot,” a chart of their expectations for interest rates.

When the Fed released its prior SEP back in March, it showed the possibility of three cuts penciled in for the remainder of the year.

Economists expect that number to drop, given that there are fewer months left on that runway and still fairly strong economic data touching down (be it the hotter-than-expected inflation reports to start the year or the stronger-than-expected job gains).

“The CPI report for May came in a bit better than we dared hope for given the string of disappointing readings to start the year,” Scott Anderson, chief US economist for BMO Bank, wrote in a note Wednesday. “If sustained, it will keep Fed rate-cut expectations that we have penciled in for September and December alive and well. Restrictive monetary policy has more work to do, and the Fed will remain patient and watchful.”

For more CNN news and newsletters create an account at CNN.com