U.S. inflation fell for a second straight month in May, a hopeful sign that the run-up in prices early this year may have run its course. If the trend holds, the Federal Reserve could be closer to cutting its benchmark interest rate from a 23-year peak.
The government said Wednesday that consumer prices excluding volatile food and energy costs, the closely watched “core” index, rose 0.2% from April to May. That was down from a 0.3% gain in the previous month and the smallest increase since October. On a year-over-year basis, core prices were up 3.4%, down from a 3.6% gain in the previous month.
Fed officials are scrutinizing their monthly inflation Data from the Fed and the U.S. Treasury Department are used to assess their progress in tackling rising prices. While overall inflation has moderated, necessities such as groceries, rent and health care remain much more expensive than they were three years ago – a long-standing source of public discontent and a political threat to President Biden’s reelection. Most other indicators suggest the economy is in good shape: Unemployment remains low, hiring is strong and consumers are spending on travel, dining out and entertainment.
Overall inflation also slowed last month, with consumer prices unchanged from April, thanks in part to sharp declines in the cost of gasoline, airline tickets and new vehicles. Compared with a year ago, consumer prices were up 3.3%, down from a 3.6% gain in the prior month.
Auto insurance costs, which have soared in recent months, actually fell from April to May, though they are still up more than 20% compared to the same period last year. Grocery prices were unchanged last month after falling slightly in April. Grocery prices are now up just 1% compared to the same period last year.
The Fed has kept its benchmark interest rate unchanged for nearly a year after rapidly raising it in 2022 and 2023 to combat the worst inflation in four decades. Those higher rates, in turn, have made mortgages, auto loans, credit cards and other forms of borrowing more expensive for consumers and businesses. While inflation is now well below its peak of 9.1% in mid-2022, it remains above the Fed’s target.
Persistently high inflation presents a thorny challenge for the Federal Reserve, which raises interest rates (or keeps them high) in an attempt to slow borrowing and spending, cool the economy and slow price increases.
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The longer the Fed keeps borrowing costs high, the greater the risk that it will weaken the economy too much and cause a recession. However, if the Fed cuts rates too soon, it risks reigniting inflation. Most policymakers have said they believe their interest rate policies are slowing economic growth and should keep inflation in check over time.
Inflation fell steadily in the second half of last year, raising hopes that the Fed could achieve a “soft landing,” raising interest rates to control inflation without triggering a recession. Such an outcome is difficult and rare.
But inflation was unexpectedly high in the first three months of this year, delaying expectations for a rate cut by the Federal Reserve and threatening to jeopardize a soft landing for the economy.
In early May, Fed Chairman Jerome Powell said the Fed needed more confidence that inflation was returning to its target before it would lower its benchmark interest rate. In recent weeks, several Fed officials have said they need to see inflation fall for several consecutive months.
There are some signs that inflation will continue to cool in the coming months. Americans, especially low-income households, are pulling back on spending. In response, several major retail and restaurant chains, including Walmart, Target, Walgreens, McDonald's and Burger King, have announced price cuts or discounts.
© 2024 The Canadian Press
