Inflation Fell To 4% In May—Lowest Reading In More Than Two Years

Inflation Fell To 4% In May—Lowest Reading In More Than Two Years

Topline

Inflation eased last month to a multiyear low, a possible cause for optimism ahead of a crucial Federal Reserve meeting on interest rates.

Shoppers have had to make some tough calls as prices surged over the last three years.

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Key Facts

Consumer prices rose 4% in May year over year, the Labor Department said Tuesday, coming in slightly below consensus economist estimates of 4.1%.

That’s the lowest inflation rate since March 2021, when prices rose at 2.6% on an annual basis.

Still, inflation remains far above the Fed’s 2% goal, and the consumer price index is up 19% compared to May 2020.

Rent prices were the largest contributor to overall inflation, followed by an increase in the prices for used vehicles, the government said; meanwhile, airline fares and household goods were among the categories that dropped in price.

Core inflation, which excludes historically volatile food and energy prices, rose 0.4% last month, in line with expectations of 0.4%.

Stocks gained slightly in early Tuesday trading, holding recent gains as the S&P 500 hovers at a 14-month high.

Key Background

The U.S. is amidst its most persistent stretch of inflation in nearly four decades due to pandemic-era supply chain snarls, Russia’s invasion of Ukraine’s impact on energy and commodity prices and soaring rent prices, among other factors. Inflation peaked at 9.1% a year ago, though the Federal Reserve’s dramatic interest rate bumps have slowed runaway prices.

What To Watch For

Whether the Fed’s Open Market Committee will raise interest rates following the conclusion of its two-day meeting Wednesday. The futures market prices roughly a 96% chance the Fed will keep rates flat at 5% to 5.25%, according to CME Group’s FedWatch Tool, down from 78% before the CPI release. That would be the first time the Fed forgoes a rate hike since last January, when the federal funds rate sat at 0% to 0.25%— and inflation ran at 7.5%.

Further Reading

Inflation Unexpectedly Ticks Down—But Prices Still Rose 4.9% In April (Forbes)

Federal Reserve Officials Divided Over Future Interest Rate Hikes, Minutes Show (Forbes)

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