The U.S. consumer inflation report for May is likely to show a slowdown, mainly due to less-expensive gas prices. However, Wall Street traders and Federal Reserve officials are particularly focused on core inflation, which excludes the volatile food and energy sectors. According to economists surveyed by FactSet, core prices are expected to have increased by 0.3% from April to May, consistent with the previous month. On an annual basis, core inflation is anticipated to have slightly declined from 3.6% to 3.5%.
Despite the moderation in overall inflation, essential items such as groceries, rent, and healthcare remain significantly more expensive than three years ago. This persistent inflation continues to affect public sentiment and poses a political challenge for President Joe Biden as he seeks re-election. While the overall economy appears healthy—with low unemployment, strong hiring, and robust consumer spending—cumulative price increases are impacting Biden’s popularity.
The Federal Reserve is closely watching these monthly inflation reports to gauge the effectiveness of its efforts to control rising prices. A 0.3% rise in core consumer prices would be considered too high over time to align with the Fed’s 2% annual inflation target. Nevertheless, the Fed prefers a separate inflation measure, which generally comes in slightly lower than the consumer price index.
Following their latest two-day policy meeting, which concludes on the same day the May inflation data is released, Fed officials are expected to keep their benchmark interest rate unchanged at approximately 5.3%, a 23-year high. This decision is influenced by the expectation that lower gas prices will have reduced overall inflation to just 0.1% from April to May, down from 0.3% the previous month, marking the lowest figure since October. Annually, consumer prices are believed to have risen by 3.4% in May, the same rate as in April.
The Fed’s challenge is to manage persistently high inflation by adjusting interest rates. The goal is to slow borrowing and spending, cool the economy, and reduce the pace of price increases without triggering a recession. The Fed has maintained its key rate unchanged for nearly a year after significant hikes in 2022 and 2023, which have led to more expensive mortgages, auto loans, and other forms of borrowing.
Maintaining high borrowing costs for an extended period increases the risk of weakening the economy too much, potentially causing a recession. Conversely, cutting rates too soon could reignite inflation. Most policymakers believe that their rate policies are slowing growth and should eventually curb inflation. The hope for a “soft landing,” where inflation is controlled without causing a recession, remains uncertain as inflation unexpectedly rose in early 2023, delaying potential rate cuts.
Fed Chair Jerome Powell indicated in early May that the central bank needed more assurance that inflation was returning to its target before reducing rates. Powell emphasized that gaining this confidence might take longer than previously anticipated. Several Fed officials have also stated the need for multiple consecutive months of lower inflation before making any changes to the rates.
Economists expect that the prices for several items, such as clothing, furniture, and new cars, fell from April to May, although used car prices may have temporarily increased after months of decline. Apartment rents, a significant inflation driver, could cool slightly, while auto insurance costs are predicted to have risen by 1% from April to May, a slowdown from the higher increases of previous months.
There are indications that inflation will continue to cool in the coming months. Americans, especially lower-income households, are reducing their spending. In response, major retail and restaurant chains, including Walmart, Target, Walgreens, McDonald’s, and Burger King, have announced price cuts or deals to attract customers.