TOPLINE
Inflation fell to its lightest level since April 2021 last month, according to the government’s core inflation metric released Wednesday morning, a welcome development for investors and prospective borrowers yearning for lower interest rates.
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KEY FACTS
Overall inflation was 3.3% in May, as measured by year-over-year changes in the Labor Department’s consumer price index, better than consensus economist estimates of 3.4%, according to FactSet.
Core inflation, which many experts consider the more important measure as it excludes the oft volatile food and energy subsets, was 3.4% last month, lighter than forecasts of 3.5%.
Both headline inflation, which was 4% last May and 8.6% in May 2022, and core inflation, which was 5.3% last year and 6% two years ago, continue to trend in the right direction, but remain above their historically acceptable boundaries.
The bond and stock markets, which both have long looked for lower inflation to justify lower interest rates, celebrated the inflation release, with Dow Jones Industrial Average futures popping more than 200 points and 10-year U.S. government bond yields falling more than 10 basis points (lower yields indicate existing bonds gained value).
KEY BACKGROUND
The consumer price index is the most commonly cited measure of inflation, tracking price changes across a basket of goods and services that the average American may purchase. Annual CPI inflation peaked at 9.1% in June 2022, the highest level since the early 1980s, as a variety of inflationary factors came to a head simultaneously, including elevated energy prices following Russia’s invasion of Ukraine, the effects of the influx of cash from government stimulus checks and supply chain bottlenecks related to the COVID-19 pandemic. Inflation’s downward trend came as the Federal Reserve hiked interest rates in an effort to slow consumer spending. Higher rates are unwelcome for borrowers like mortgage seekers and small business loan applicants, but they did help bring down inflation to a more palatable level. Still, inflation is well above the historically accepted 2% target. Goldman Sachs economists project headline CPI inflation to fall to 3.1% by the end of 2024 and 2.6% by the end of 2025. Inflation was not over 2.9% from 2015 to 2020, proving there is still work to be done.
BIG NUMBER
5.3%. That’s how much more expensive average rent was than it was in May 2023, according to CPI. Rent is among the stickiest and most painful items to grow more expensive in recent years, up more than 25% since May 2020, shortly before the beginning of this inflation cycle.
WHAT TO WATCH FOR
The Fed’s interest rate-setting committee will announce the results of its June meeting at 2 p.m. ET. Investors expect the Fed to keep rates at the two-decade high of over 5% but anticipate lower rates by year’s end assuming inflation subsides.
TANGENT
Inflation is a major campaign issue for former President Donald Trump, who declared last week the U.S. is amidst the worst bout of inflation “in the history of our country.” That claim is false, as annual CPI inflation was higher during the 1970s-1980s energy crisis and around both World Wars, but Americans are spending much more than they did just a few years ago. The consumer price index is almost 20% higher than it was in December 2020, corresponding to when Joe Biden took power, with many voters expressing dismay at the administration’s handling of inflation.
