The Hill
Key Learnings From May's Sharp Inflation Drop
Discount offers are visible at a shopping outlet in Downers Grove, Illinois, on Wednesday, April 26, 2023. The United States Bureau of Labor Statistics will release the report on the country's consumer prices for the month of April on Wednesday. (Photograph taken by Nam Y. Huh/Associated Press)
In May, the prices that consumers paid for goods and services decreased more than what experts had predicted. This resulted in an annual increase of only 4 percent, which happened because the Federal Reserve had raised interest rates consecutively for 10 times.
This is the smallest yearly increase observed since the beginning of 2021. Although it is still twice as high as the Fed's desired rate of 2 percent, experts are becoming optimistic that the current period of inflation will soon come to an end.
This is great news for individuals who have seen their incomes decrease due to the high cost of necessities such as rent and groceries. Inflation has grown at a faster rate than wages, causing consumers and employees alike to become financially strained.
This news is not good for a lot of economists who believed that inflation could only be controlled by creating a lot of unemployment, and that companies charging inflated prices was the reason why prices remained high.
Mostly, both those presumptions have been demonstrated as incorrect.
Despite the decline in prices, the unemployment rate has remained at a record low.
As businesses have revamped their strategies to appeal to more forgiving customers and maintain wider profit margins, greater earnings have become an even bigger portion of the costs.
Despite many predictions last year, we haven't experienced a recession yet. People thought it would happen, but it hasn't.
Joey Politano, who is an economist and writes the Apricitas economics newsletter, stated on Tuesday that currently the inflation rate is at 4 percent, the unemployment rate is less than 4 percent, and the price of gas is less than $3.50.
"I'm certain that this is precisely what people anticipated a year ago when inflation surpassed 9% and petrol prices reached their peak," he joked.
Here's some information regarding the most recent figures of the CPI made by the Labor Department.
Some Food Prices Drop, But Overall Still High
The cost of food increased by 0.2% between April and May, which is a change after staying the same for the past two months. The prices of food continue to be more expensive than inflation, with an annual increase of 6.7%.
However, food prices have been experiencing a steady decline throughout the year 2023, in contrast to the overall Consumer Price Index (CPI) which has faced a more volatile decrease after reaching its highest point in June 2022.
The cost of eggs has decreased by 13.8 percent in comparison to what it was a month ago. Similarly, milk prices have dipped by 0.6 percent and turkey prices have gone down by 2 percent.
Every year, the cost of citrus drops by 5 percent compared to the previous May. Bacon is now almost 10 percent less expensive and fresh fish has gone down in price by 2 percent.
At present, the cost of white bread has increased by 13.4 percent compared to the previous year. Similarly, the cost of lettuce is now 9.4 percent higher and frozen fruits as well as vegetables are now 12.9 percent more expensive.
Energy Savings Boost Economy
One reason why prices have been decreasing consistently without a significant economic downturn is because the inflation experienced post-pandemic has only affected certain industries. The rise and fall of prices have occurred in various stages, rather than being a consequence of an excessive amount of demand across the board.
Last year, the cost of energy significantly increased due to the war in Ukraine. This caused consumer prices to remain high and worsened the initial issues with supply chain obstructions that led to more inflation.
The second surge in energy has come to an end, and now the costs of energy are significantly lower. In fact, they have even entered the realm of deflation.
According to the CPI data released on Tuesday, the cost of energy has decreased by 11 percent compared to the previous year. Specifically, the price of regular unleaded gasoline has dropped by a significant 20.3 percent over the same period. Currently, the average cost per gallon of gasoline is $3.59, which is a notable reduction from last year's price of over $5.
The group known as the CPI has recorded a significant reduction in their classification of "other motor fuels", which covers both automotive diesel and other fuel types used for shipping purposes. Specifically, this category has declined by 26 percent in comparison to the same time last year.
Earlier this month, the members of OPEC+ led by Saudi Arabia made a commitment to continue cutting oil production by 1 million barrels per day. This decision was made after the existing cuts were not effective in increasing crude prices in the global markets. It is possible that the prices of energy may increase during peak travel periods this summer, but this is not certain.
Increased Shelter Expenses Drive Inflation
Not including the costs of food and housing, the "core" CPI experienced a yearly increase of 5.3 percent in May. Additionally, the core services that exclude the housing sector rose by 4.6 percent over the same period, which is being closely monitored.
The high cost of housing is one of the main factors contributing to the core inflation. It has increased by 0.6% in the past month and jumped by 8% in the past year which is twice the overall Consumer Price Index.
According to Jeremy Horpedahl, an economist at the University of Central Arkansas, normal levels of CPI inflation, not including shelter, are currently at 2.2 percent over the past year. This is a considerable decrease compared to the 10 percent rate from a year ago. However, shelter inflation remains high at 8 percent.
Fed officials may face an issue as they were relying on reduced rental costs to aid in decreasing inflation.
During an event in Boston last month, Michelle Bowman, a member of the Federal Reserve board, stated that she anticipates a decrease in rental costs will eventually be evident in inflation measurements as newly signed leases are factored in.
It seems that the housing market for private homes is picking up again and property values are stabilizing. This can have an impact on our efforts to reduce the rate of inflation.
Wages Exceed Prices But Slowdown Persists
The wages that Americans earn, taking into account the rising costs of things, increased by 0.3% in May. Production and non-supervisory workers saw a higher increase of 0.4%.
For the first time in over 24 months, the growth of wages has surpassed the inflation rate, which only increased by 0.1 percent in May. Nevertheless, the overall tendency in wage growth has considerably decreased, dropping to an annual increment of 4.3 percent from almost 6 percent in March of 2022.
According to economist Adam Ozimek, inflation and wage growth are decreasing for sure, even though it was believed that this couldn't occur without a substantial rise in joblessness. This happened on Tuesday.
What's Next For The Fed?
The current state of the housing market notwithstanding, the Federal Reserve will be heartened by the positive developments of reduced inflation and less significant wage growth.
On Tuesday, a lot of economic experts expected that the reduction of CPI would give the Federal Reserve the green light to halt the increase of interest rates during their meeting happening this week. The conclusion of this meeting will be revealed on Wednesday.
This would be the initial break since the Federal Reserve began increasing interest rates in March of last year during an extremely rapid quantitative tightening phase in history.
On Tuesday, CME, a financial institution, used a forecast model that predicted there was a 93% chance that the Federal Reserve would halt the increase of interest rates on Wednesday.
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