Inflation Sees Lowest Increase in 2 Years

June 13, 2023

The U.S. inflation rate cooled in May to its lowest annual rate in more than two years, falling to about half of its peak last year, potentially clearing the way for the Federal Reserve to pause additional interest rate hikes.

The consumer-price index (CPI), which tracks the prices for a wide swath of goods and services, increased just 0.1% from the month before. On an annual basis, inflation rose 4%, down from 4.9% in April and less than half of the 9.1% seen last June when inflation hit its recent peak. May’s annual increase was the smallest since May 2021, when inflation was just beginning its climb to the highest level in more than 40 years.

Consumers saw relief from higher prices in food and energy. A big decline of 3.6% in energy prices and a small 0.2% increase in food prices helped keep the topline CPI in check.

Unfortunately, the so-called “core” inflation, which excludes volatile categories like food and energy, rose 0.4% on a month-to-month basis and was up 5.3% from the year before, down only slightly from April’s 5.5% increase. Economists see core inflation as a better indicator of future inflation, and core inflation’s “stickiness” suggests the Fed may still have to raise rates again. 

Core prices remain elevated partly due to a surge in shelter costs, which account for one-third of the index’s weighting. Rental prices in particular are amping up CPI. Rents surged in the months and years following the pandemic, and while rent growth has cooled significantly, falling to just 2% annually in May from double-digit increases a year prior, those price changes will take time to show up in inflation data because of the lag in how housing costs are calculated.

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