US inflation slowed in May, a sign that price pressures may be easing

WASHINGTON (AP) U.S. inflation slowed in May for a second straight month, an encouraging sign that the price acceleration that occurred earlier this year may have passed. The trend, if it continues, could bring the Federal Reserve closer to lowering its benchmark interest rate from its 23-year high.

Consumer prices, excluding volatile food and energy costs, the closely watched benchmark, rose 0.2% from April to May, the government said on Wednesday. This is down from 0.3% the previous month and is the smallest increase since October. Measured against a year earlier, underlying prices rose 3.4%, below last month's 3.6% rise, and the smallest such increase in three years.

Fed officials, who wrap up their final policy meeting later Wednesday, scrutinize inflation data each month to gauge their progress in combating rising prices. Even as overall inflation slows, basic necessities such as groceries, rent and health care are much more expensive than they were three years ago, providing a continued source of public discontent and a political threat to President Joe Biden's re-election bid.

Most other measures suggest the economy is healthy: unemployment remains low, hiring is robust and consumers are traveling, eating out and spending on entertainment.

And Wednesday's report indicates that consumers are starting to feel some relief after soaring prices over the past three years. Grocery costs remained unchanged, on average, from April to May, after actually decreasing 0.2% the month before. Food prices have only risen 1% in the past 12 months, although they are still up around 20% from three years ago.

Average gas prices fell 3.6% nationally between April and May, although they were 2.2% higher than a year earlier. Those declines continued, averaging $3.45 a gallon Wednesday, down 17 cents from the previous month. Americans didn't drive as much over Memorial Day weekend as in previous years, which reduced demand and oil prices fell.

Headline inflation also slowed last month, with consumer prices remaining unchanged from April to May. Measured against the previous year, prices rose 3.3%, less than the 3.6% increase a month earlier.

That's certainly good news, said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. This shows that the inflation challenge in the United States is not as difficult as monetary policy makers think.

Later Wednesday, Fed policymakers are expected to cut their forecast for interest rate cuts by the end of the year to two, down from three in their previous forecast in March. Before Wednesday's release of subdued inflation numbers, many economists were concerned that the Fed was planning just one rate cut this year. But most analysts say the slowdown in inflation, if it continues, makes two cuts more likely, probably starting in September.

We believe this marks the start of a possible rate cut in September, but the Fed will need to see much more sustained progress in the coming months to achieve this reduction, Krishna Guha, an analyst at Evercore ISI, said in a note. to customers.

In early May, Chairman Jerome Powell said the central bank needed more confidence that inflation would return to its 2% target before cutting its benchmark rate. Fed officials have said in recent weeks that they need several consecutive months of falling inflation to gain that confidence.

Small business owners are less likely to report their parts and raw material costs are increasing than a year ago, surveys show, suggesting they are under less pressure to pass on higher expenses. high.

One such businessman is Amber Carfield, design director at Kitchens by Good Guys, a home improvement company near Phoenix. Carfield said costs for cabinets, shower glass and countertops remain much higher than they were a few years ago. But price increases have eased this year, she said, especially compared to two years ago, when suppliers could raise prices on kitchen cabinets three times a year. Before the pandemic, prices typically only changed once a year at most.

It's a little more manageable, Carfield said. The bleeding has stopped.

Prices of plumbing and electrical fixtures have started to fall, she added.

The market really is flooded with so many options when it comes to lighting fixtures, she said. They have to be a little more competitive.

The inflation report released Wednesday showed that prices of airline tickets, furniture and clothing all fell in May, helping to keep inflation in check. And the cost of auto insurance, which has soared in recent months, actually fell from April to May, although it remains up more than 20% from a year earlier.

Prices are still too high, but today's report shows welcome progress in reducing inflation, which… is down nearly two-thirds from its peak, Biden said Wednesday.

The decline in auto insurance is one of the main reasons underlying inflation was so weak in May. Insurance rates have jumped because prices of new and used cars have soared during the pandemic, mainly due to supply shortages. Insurers have to pay more to replace damaged cars, and companies have increased their premiums to compensate for these higher costs.

More expensive auto insurance is an example of how inflation has largely been fueled by the lingering effects of pandemic-related disruptions, rather than excess consumer demand or rising wages. Apartment rents and a measure of homeownership are another example. They are still increasing faster than before the pandemic. But they reflect the increased demand for housing that emerged during and after COVID, when many people were looking for more living space.

Economists point to real-time measurements of new rents, which show virtually no increase as builders have completed a flood of new apartment buildings. Slowing new lease costs are expected to feed into the government's inflation measures over time, acting as another factor in reducing inflation.

Other signs also suggest that inflation will continue to slow over the coming months. Americans, especially lower-income households, are cutting back on spending. In response, several major retail and restaurant chains, including Walmart, Target, Walgreens, McDonalds and Burger King, responded by announcing price cuts or deals.

The Fed kept its benchmark rate unchanged for nearly a year after quickly raising it in 2022 and 2023 to combat the worst surge in inflation in four decades. These higher rates have, in turn, led to more expensive mortgages, auto loans, credit cards and other forms of consumer and business borrowing. Inflation is now well below its peak of 9.1% reached in mid-2022.

Persistently high inflation poses a thorny challenge for the Fed, which raises interest rates or keeps them high in an attempt to slow borrowing and spending, cool the economy and slow the pace of growth. prices.

The higher the Fed keeps borrowing costs, the more likely it is to weaken the economy too much and cause a recession. But if he cuts rates too soon, he risks reigniting inflation.

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