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Inflation Rate Falls in May: Will it Impact the Fed?

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The Consumer Price Index (CPI), a key measure of inflation, fell to 3.3% in May from 3.4% in April, according to the U.S. Bureau of Labor Statistics. This marks the second straight month that inflation has fallen, as it dropped from 3.5% in March to 3.4% in April.

Federal Reserve members had said they were looking for inflation rates to move lower for a series of months before deciding to lower the federal funds rate. However, while this makes two straight months with a falling CPI, do not expect the Fed to take any action at its meeting on Wednesday.

Core CPI at lowest rate since 2021

The May CPI was lower than economists expected, as the median forecast was for it to stay at 3.4%. The monthly gain was also better than expected, as the May CPI was flat month over month, although economists had expected it to rise 0.1%.

In addition, the core CPI, which excludes the more volatile food and energy prices, was lower than anticipated at 3.4%. Economists had estimated it at 3.5% in May.

The core CPI is now at its lowest rate since April 2021. This is significant as the Fed and the markets typically view core CPI as a more accurate depiction of future inflation rates.

Examining the numbers more closely, shelter and food-away-from-home prices rose the most month over month in May, up 0.4% each.

The 12-month price change for shelter was 5.4%, while overall food prices are up 2% over the last 12 months. Prices for food away from home rose 4%, while prices for food at home are only 1% higher.

Energy prices declined 2% in May led by gasoline prices, down 3.6%. Energy prices remain 3.7% higher than May 2023, while gas prices are 2.2% higher.

Meanwhile, new-vehicle prices dropped 0.5% in May and are now 0.8% lower than a year ago. Transportation services also fell 0.5% last month, but they are still 10.5% higher than April 2023.

In fact, transportation services remain the biggest source of inflation, with prices up 10.5% over the past 12 months, followed by electricity, up 5.9%. Prices for used cars and trucks have fallen the most over the past 12 months, plunging 9.3%.

Medical-care costs rose 3.1% year over year.

What will the Fed do?

While the lower inflation rates were a surprise, it is unlikely that they will lead to the Fed lowering interest rates this cycle. The Federal Open Market Committee is set to conclude its two-day meeting today and announce its decision on interest rates at 2 p.m. Eastern.

While inflation has come down two months in a row, there are other economic factors the Fed considers, like the labor market and the Personal Consumption Expenditures report.

However, the markets reacted positively, opening higher today. The Dow Jones Industrial Average was up about 371 points (1%) at the opening bell, while the Nasdaq Composite rose 200 points (1.1%). The S&P 500 had gained 50 points, up 0.9%.

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Dave Kovaleski
Senior News Writer

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