US inflation cooled in May in a sign that price pressures may be easing

WASHINGTON (AP) — 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 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% from April to May, the government said Wednesday. That was down from 0.3% the previous month and was the smallest increase since October. Measured from a year earlier, core prices climbed 3.4%, below last month’s 3.6% rise, and the mildest such increase in three years.

Fed officials, who will end their latest policy meeting later Wednesday, are scrutinizing 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 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 traveling, 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% the previous month. Food prices have risen just 1% over the past 12 months, though they’re still up about 20% from three years ago.

Average gas prices tumbled 3.6% nationally just from April to May, though they’re 2.2% higher than they were a year earlier. Those declines have continued, with gas averaging $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%, less than the 3.6% increase a month earlier.

“It’s certainly welcome news,” said Tom Porcelli, chief U.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.”

Later Wednesday, the Fed’s policymakers are 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% 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-business people 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.

One such businessperson is Amber Carfield, director of design at Kitchens by Good Guys, a home renovation firm near Phoenix. Carfield said the costs of cabinets, shower glass and countertops remain far higher than they were a few years ago. But price increases have eased this year, she said, particularly from two years ago, when suppliers might raise the prices of kitchen cabinets three times in a year. Before the pandemic, prices typically changed only once a year, at most.

“It’s a little more manageable,” Carfield said. “The bleeding has stopped.”

Plumbing and electrical fixtures have started to actually fall in price, she added.

“The market is really flooded with lots and lots of options,” when it comes to fixtures, she said. “They are forced to be a little more competitive.”

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% 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.

The drop in auto insurance was a key reason why core inflation came in so low in May. Insurance rates have jumped because the prices of new and used cars soared during the pandemic, mostly because of supply shortages. Insurers must pay more to replace wrecked cars, and the companies have raised premiums to offset those higher costs.

Pricier auto insurance is an example of how inflation has been driven largely by the lingering effects of pandemic disruptions, rather than excessive consumer demand or rising wages. Apartment rents and a measure of homeownership are another example. They’re still rising faster than they did before the pandemic. But they reflect the increased demand for housing that emerged during COVID and its aftermath, when many people sought more living space.

Economists point to real-time measures of new rents, which show barely any increase at all, with builders having completed a flood of new apartment buildings. The slowdown in new lease costs should feed into the government’s inflation measures over time, acting as another factor lowering inflation.

Other signs also suggest that inflation will continue to cool in the coming months. Americans, particularly lower-income households, are pulling back on their spending. In response, several major retail and restaurant chains, including Walmart, Target, Walgreen’s, McDonald’s and Burger King, have responded by announcing price cuts or deals.

The Fed has kept its key rate unchanged for nearly a year after having rapidly raised it in 2022 and 2023 to fight the worst bout of inflation in four decades. Those higher rates have led, in turn, to more expensive mortgages, auto loans, credit cards and other forms of consumer and business borrowing. Inflation is now far below its peak of 9.1% in mid-2022.

Persistently elevated inflation has posed a vexing challenge for the Fed, which raises interest rates — or keeps them high — to try to slow borrowing and spending, cool the economy and ease the pace of price increases.

The longer the Fed keeps borrowing costs high, the more it risks weakening the economy too much and causing a recession. Yet if it cuts rates too soon, it risks reigniting inflation.