Inflation Eases Slightly in May: What It Means for the Economy

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Written By Keziah Monique Gayo

The consumer price index (CPI) showed no increase in May, signaling a slight loosening of inflation’s grip on the U.S. economy. This development, reported by the Labor Department, comes as a welcome relief amid ongoing inflationary pressures.

Key Highlights from the CPI Report


The CPI, which measures the cost of a basket of goods and services across the U.S. economy, remained flat for the month but increased by 3.3% year-over-year. Economists surveyed by Dow Jones had anticipated a 0.1% monthly rise and a 3.4% annual rate.

Excluding food and energy prices, core CPI increased by 0.2% monthly and 3.4% annually, slightly below expectations of 0.3% and 3.5%, respectively.

Market Reactions and Economic Implications

Following the release of the CPI data, stock market futures rose while Treasury yields declined. Although headline and core inflation figures were lower, shelter inflation increased by 0.4% for the month and 5.4% year-over-year. Housing costs remain a significant factor in the Federal Reserve’s battle against inflation, representing a substantial portion of the CPI weighting.

Energy prices contributed to the subdued inflation, with the energy index dropping by 2% and gas prices falling by 3.6%. Motor vehicle insurance, another persistent inflation component, saw a 0.1% monthly decline but remained over 20% higher year-over-year.

Robert Frick, a corporate economist with Navy Federal Credit Union, commented, “Finally, some positive surprises as both headline and core inflation beat forecasts. There was relief at the pump, but unfortunately, home and apartment costs continue to rise and remain the main cause of inflation. Until those shelter costs begin their long-awaited fall, we won’t see major drops in CPI.”

Federal Reserve’s Next Moves

The CPI report arrives at a crucial time as the Federal Reserve contemplates its next steps in monetary policy. The Federal Open Market Committee (FOMC) is expected to conclude its two-day policy meeting with a decision on interest rates.

Markets widely anticipate that the Fed will maintain its benchmark overnight borrowing rate in the range of 5.25%-5.50%, but investors are keenly watching for signals about future policy direction.

Post-CPI release, futures traders increased the likelihood of a Fed rate cut in September, with the probability rising to 73% from 53% the previous day, according to the CME Group’s FedWatch measure. The chances of a second cut in December also increased to 72%.

However, market outlooks remain volatile. Fed officials have emphasized the need for sustained positive inflation data before considering policy easing.

Joseph LaVorgna, chief economist at SMBC Nikko Securities, stated, “You’re going to need three more months of very friendly inflation data to cut in September. If they start easing or talk about easing more, I think they’re going to complicate their own goals of getting inflation back to 2%.”

Future Economic Projections

Persistent inflation has kept the Fed from changing rates since the last hike in July 2023. In March, FOMC members indicated potential rate cuts totaling 0.75 percentage points for the year but might revise this down to one or two reductions.

The committee will also update projections for GDP growth, inflation, and unemployment, all potentially influenced by the latest CPI data.

Although the Fed prioritizes the Commerce Department’s personal consumption expenditures price index over the CPI, the latter remains a critical factor in their broader economic strategy.

The unchanged CPI in May suggests a slight easing of inflation, yet significant challenges remain, particularly in housing costs. The Federal Reserve’s upcoming decisions will heavily depend on continued positive inflation data, impacting future economic projections and monetary policy.


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