Inflation at a 2-Year Low: May’s Reading Shows Cooling Economy

According to the latest report from the Bureau of Labor Statistics, consumer price growth in the United States has cooled down, reaching its lowest level since March 2021. On an annual basis, price growth decreased to 4%, while the month-over-month increase stood at just 0.1%. These figures outperformed economists’ expectations, who had forecasted a 4.1% annual growth and a 0.1% monthly increase, lower than April’s reading of 0.4%.

The data indicates a meaningful decline in inflation and the resulting high prices. Notably, there was a noticeable decrease in the growth of prices for services such as medical services and air travel, which is a crucial category closely monitored by the Federal Reserve. The “core” services category, excluding housing costs, saw a decline from 5.1% to 4.6% year over year in May.

Overall, these figures suggest a positive trend of easing inflationary pressures in the US economy, providing some relief to consumers and indicating a potential stabilization of prices in the market.

Price declines were observed in various categories; however, food prices continued to experience faster acceleration compared to other sectors, with a 6.7% overall year-on-year increase. Specifically, prices for food purchased for home consumption rose by 5.8%, while prices for dining out increased by 8.3%.

As we approach the one-year mark since inflation reached its highest point in over four decades, analysts are engaged in a debate regarding the rate at which inflation will continue to recede.

Some objects aren’t dropping as fast as they used to.

Despite overall declines in inflation, there are certain aspects that have not experienced significant decreases.

According to economists at Citibank, workers’ pay increases have remained substantial, averaging around 6% since March 2022. This pace of wage growth is seen as indicative of underlying price inflation stabilizing at approximately 4.5% to 5%.

Another area where prices have continued to rise rapidly is groceries. Data from the Adobe Digital Price Index, which is separate from the inflation data published by the U.S. Labor Department, shows that prices for food ordered online increased by 8.2% over the past 12 months as of May. Although this figure is lower than the high of 14.3% recorded in September, the data suggests that consumers are increasingly purchasing more of their groceries online. Consequently, the category has generally moved in alignment with the official Consumer Price Index.

While overall inflation may be moderating, these particular factors highlight that certain sectors, such as wages and online grocery purchases, have not experienced as significant of a decline.

According to Purdue University professor and department head of Agricultural Economics Jayson Lusk, food prices are impacted by the same factors that affect pricing in other industries, such as rising wage expenses. In an interview, Lusk stated that compared to pre-pandemic levels, food and beverage merchants’ earnings in the food service sector had increased by more than 20%.

According to Lusk, “the cost of agriculture is small compared to other costs for food; it’s primarily labour, transportation, and real estate.” Therefore, if you’re looking for causes, they’re most likely in those areas.

The next step is made by central bankers.

Central bankers are preparing to take action in response to the ongoing inflationary pressures. The Federal Reserve, with the aim of cooling the overall inflation rate to 2%, is expected to announce its latest interest rate policy on Wednesday. It is anticipated that they will maintain the key federal funds rate at approximately 5%, following a series of 10 consecutive rate hikes since March of the previous year.

The strategy behind increasing interest rates is to make borrowing and investment more expensive, which, in turn, is intended to reduce the demand for goods and services within the economy.

While the Federal Reserve takes into account the impact of price increases on consumers, it typically discounts changes in food and gas prices due to their inherent volatility. Instead, the focus is now on price increases in services such as travel costs, encompassing airfare and hotel expenses. These costs have continued to surge, which is likely to keep inflation at an elevated level.

Experts have expressed concern about the persistence of price increases in services. Joe Davis, chief global economist at Vanguard, and Andrew Patterson, a senior international economist at Vanguard, highlighted that the magnitude of price increases in services has not slowed enough to provide confidence that inflation is firmly on a path towards the target rate of 2%. Ongoing wage increases have been cited as one of the reasons behind the stubbornness of this measure.

In summary, central bankers are preparing to take action by maintaining interest rates at their current level in an effort to manage inflation. The focus is shifting towards the impact of price increases in services, while wages continue to be a contributing factor in the inflationary environment.