US inflation cools, a sign price pressures may be easing

Inflation in the United States eased in May for a second straight month, a hopeful sign that a pickup in prices that occurred early this year may have passed. The trend, if it holds, could move the US Federal Reserve closer to cutting its benchmark interest rate from its 23-year peak.

Consumer prices excluding volatile food and energy costs – the closely watched ‘core’ index – rose 0.2 per cent from April to May, the government said Wednesday. That was down from 0.3 per cent the previous month and was the smallest increase since October. Measured from a year earlier, core prices climbed 3.4 per cent, below last month’s 3.6 per cent rise, and the mildest such increase in three years.

Fed officials, who ended their latest policy meeting on Wednesday, were scrutinising each month’s inflation data to assess their progress in their fight against rising prices. Even as overall inflation moderates, such necessities as groceries, rent and health care are much pricier than they were three years ago – a continuing source of public discontent and a political threat to US President Joe Biden’s re-election bid.

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

And Wednesday’s report indicated that consumers are beginning to get some relief from the price spikes of the past three years. Grocery costs were unchanged, on average, from April to May, after actually falling 0.2 per cent the previous month. Food prices have risen just one per cent over the past 12 months, though they’re still up about 20 per cent from three years ago.

Average gas prices tumbled 3.6 per cent nationally just from April to May, though they’re 2.2 per cent higher than they were a year earlier. Those declines have continued, with gas averaging US$3.45 a gallon Wednesday, down 17 cents from a month ago. Americans didn’t drive as much over the Memorial Day weekend as they have in previous years, reducing demand, and oil prices have fallen.

Overall inflation also slowed last month, with consumer prices unchanged from April to May. Measured from a year earlier, prices rose 3.3 per cent, less than the 3.6 per cent increase a month earlier.

“It’s certainly welcome news,” said Tom Porcelli, chief s economist at PGIM Fixed Income. “It drives home that the inflation challenge in the United States is not as challenging as monetary policy makers believe.”

The Fed’s policymakers were expected to reduce their forecast for interest rate cuts by year’s end to two, down from three in their previous forecast in March. Before Wednesday’s mild inflation figures were released, many economists worried that the Fed would predict just one rate cut this year. But most analysts said the inflation slowdown, if it continues, makes two cuts more likely, probably starting in September.

“We think this starts the clock on a potential September rate cut, but the Fed will need to see much more sustained progress in the months ahead to deliver that cut,” Krishna Guha, an analyst at Evercore ISI, said in a note to clients.

In early May, Chair Jerome Powell said the central bank needed more confidence that inflation was returning to its 2.0 per cent target before it would reduce its benchmark rate. Fed officials said in recent weeks that they needed to see several consecutive months of lower inflation to gain that confidence.

Small businesses are less likely to say the costs of their parts and raw materials are rising than they were a year ago, according to surveys, suggesting that they’re facing less pressure to pass on higher expenses.

Wednesday’s inflation report showed that the prices of airfares, furniture and clothing all fell in May, helping keep inflation in check. And the cost of auto insurance, which has soared in recent months, actually dipped from April to May, though it’s still up more than 20 per cent from a year earlier.

“Prices are still too high, but today’s report shows welcome progress on lowering inflation, which ... is down nearly two-thirds from its peak,” Biden said Wednesday.

AP